Menu-based life and healthcare insurance packages account for a major share of protection sales. They bring advantages for advisers and clients alike.
For the consumer, the benefits include flexibility, convenience and potential savings in premium costs.
The products are highly adaptable and enable the various components to be tailored to meet identified individual needs. The blend can be varied later on as the circumstances and responsibilities of the client evolve.
Guaranteed insurability facilities will often enable a policyholder to increase protection levels without having to provide fresh information about their continuing good health.
The client should also find it much more convenient to maintain one all-embracing package of policy documentation rather than have to keep track of a hotchpotch of paperwork for different plans arranged with a variety of providers over a series of years.
The price of the product should include a single policy fee instead of the three, four or more that would be levied on separate plans. For contracts where the focus is on protection, the policy fee can have more of an impact on the total price than the basic premium rate.
Convenience is also a factor for the adviser. There are obvious administrative advantages – for example, when tracking and reconciling commission – in dealing with a single package and its provider instead of a number of separate policies issued by a variety of different insurers. The key is to select and recommend what appears to be the most appropriate plan and its provider at the outset.
Until recently, the main thrust of the marketing message has concentrated on components offering critical-illness cover, income protection and life insurance. A waiver of premium facility has also been an integral part of the package. But there is a strong case for adding long-term-care insurance to the menu.
Clients should be able to apply for income protection that will continue through the rest of their lifetime rather than cease at their planned retirement age. The component starts off in fairly conventional fashion but the nature of the protection changes to LTC insurance when the individual retires and pension income takes over from occupational earnings as the main source of household income.
During the initial income protection stage, the definition of disability depends on whether the client is working and, if so, the nature of their job. For most people in white-collar positions, the definition will be an inability to carry out one's own occupation. For those in certain more physically demanding types of work, there may be a more stringent definition of own occupation and any other occupation for which they are suited by way of education, training experience and status.
A third definition, based on the inability to perform three out of six activities of daily living, is used for those who do not work and earn. This applies to individuals who are between jobs, as well as to those whose main duties are looking after the children and home. During this pre-retirement stage, the six ADLs are shopping, cooking, housework, handling money, taking medicine and child minding.
For clients in gainful occupations and earning up to £50,000 a year, the maximum benefits are expressed as a percentage of 50 per cent of pre-incapacity earnings. The percentage limit may be scaled down for higher earners. As the payments should be tax-free, this should be sufficient to provide both a reasonable standard of living and a financial incentive to recover and return to work.
Two forms of guaranteed insurability option are available for an additional premium price. First, applicants can ask at the outset for their cover to rise each year in line with the index of retail prices. The second option enables them to increase their protection if their income should rise – for example, following promotion – by more than the rate of inflation. The premium cost of each uplift would be based on the policyholder's age and the rates applying at the time.
There is also nothing to prevent a client from applying for an ad hoc increase in cover on their existing plan, provided this does not take them over the maximum benefit level laid down. But any application for such top-up protection would be underwritten in the normal way.
When the policyholder attains the watershed age at which they originally planned to retire, the nature of the cover changes from income protection to LTC insurance. There is now only one definition of incapacity. Although this is based on the inability to perform three out of six activities of daily living, the ADLs are different from those that applied earlier on. They are washing, dressing, moving, transferring, feeding and continence.
Under current fiscal legislation, the benefit should be payable as a tax-free income – whether paid to the policyholder, to someone with the enduring power of attorney to act for them or to the care provider – for what remains of the claimant's life.
Depending on the level of benefit selected at the outset and whether or not there have been RPI-linked or other increases afterwards, the claim payments may more than match the ongoing costs of care.