Historically, family protection has been written as level term insurance paying a lump sum benefit on the death of the breadwinner.Some advisers will recall exam questions in which the examiner was looking for a recommendation that life cover levels were calculated using a lump sum of 20 times salary. The idea was, that based on an assumed interest rate – usually 5 per cent – this lump sum would provide an income equivalent to salary. This rule of thumb is still in use today. A quick search of the internet using “life cover calculator” as the search request will bring up many calculation tools which follow this concept and it is certainly a good starting point. However, does it really provide adequate cover for someone who may see a rapid increase in salary over the next few years or someone who is paid performance-related bonuses and is about to hit their prime income-earn- ing years? After all, someone earning, say, 30,000 a year today, assuming that they are awarded increases at 5 per cent a year, will be earning just under 60,000 a year in 15 years. Unless the level of cover that they effect is in some way linked to those increases in salary, how useful is the cover that they have in place? Increases in salary, especially big increases, are usually used to improve lifestyle. We know that the savings gap is huge, indicating that although the prudent among us may save some of that extra cash each month, the majority use it to buy those things that we could not pre- viously afford. The death of a breadwinner in these circum these circumstances could mean a massive step backwards to a former lifestyle – which, on top of the death of a loved one, would be very difficult to bear. Perhaps we should be looking to have that lump sum cover increased on a regular basis. The good news is that this is an option available from a number of product providers. You may be able to choose the rate of increase – between a set minimum and maximum – or have it based around RPI or either of these two options may be available. Whichever is chosen, at least you have built in the ability for the sum assured to remain realistic compared with salary. You may also find that the product provider does not insist that every increase option is taken, allowing the client to retain some flexibility in their decision-making – something that modern lifestyles demand. The key is to make sure that the increasing option is part of the plan structure at outset as it is highly unlikely that you will be able to add it in later. Remember of course, these “automatic” increa- ses are not subject to underwriting and could therefore prove to be even more valuable to the client in later life when perhaps acceptance at ordinary rates may not be a foregone conclusion. We can solve the issue of keeping pace with salary by increasing the lump sum benefit but the question of whether or not lump sum cover is always the right way to cover the family need still exists. The death of a breadwinner raises many issues for the surviving spouse but the main one will be replacing the lost income. Investing a lump sum will provide the answer but there is an alternative – the often-underused family income benefit. Family income benefit went out of favour some years ago and many providers dropped it from their portfolio. However, the advent of flexible menu-based plans has seen Fib make a comeback and it is an ideal benefit for family protection. It does exactly what it says on the tin – provides the family with an income, tax-free, in the event of the breadwinner’s death. Family income benefit can also be written on an increasing basis, using the same factors for the increases, so that the benefit payable will match the lost income more closely. Some product providers will even allow for the increases to continue in the event of a claim so the benefit in payment increases – ensuring the value of the income is not eroded by inflation. Life cover is not the only protection need and critical-illness insurance has become a major part of the protection market over the past 15 years or so. Lump sum cover again tends to be the focus but you can buy critical cover in the form of family income benefit. Similarly, one need that the client may have in the event of a diagnosis of a critical illness is to replace lost income, so family income benefit could also fit the bill – with increasing benefits where appropriate. One key point to remember with income-based critical-illness cover is that once the claim is admitted, the income will continue to be paid, irrespective of whether the individual subject to the claim is alive. If the income starts and the life assured subsequently dies, the remaining income payments will be paid to the estate for the rest of the term. Alternatively, the beneficiaries of the estate could ask for a commuted lump sum to be paid to them if they did not need the payments to be in the form of an income. This would be additional to any life cover that might be payable on death. The overriding consideration for advisers should be to match benefits to need. This may mean that some lump sum benefit is required alongside some Fib-style benefit and today’s modern menu-based products allow these benefits to be written in one plan and can even permit one of the benefits to be increasing while the other remains level if that is what is needed. Level term insurance is no longer the only option. Advisers can design tailor-made solutions to client needs and ensure that those tailor-made benefits meet the client’s needs not only at outset but also on a continuing basis by building in the appropriate levels of increase.
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