Do individuals do enough to protect themselves against inheritance tax? Are intermediaries doing enough to encourage them to do so and what are the best options?
Bennett: Market statistics have shown the number of people leaving an estate which qualifies for inheritance tax has risen by fivefold over the past two years to around two million. This represents a significant opportunity for intermediaries to provide addedvalue services to their customers in the form of inheritance tax planning. However, it is probably true to say that there has been a perception that inheritance tax is something that only the very wealthy need to consider.
There is a growing awareness now that the significant increases in property prices in recent years have resulted in inheritance tax becoming a real issue for a much bigger proportion of the population. If the market has been slow to adopt inheritance tax planning, perhaps for this reason, we would expect very quickly for it now to become a key focus for advisers. Several solutions already exist but what is needed now is a greater focus on this area by advisers and providers.
Pardoe: With a massive rise in house prices over the last five years, an increasing number of people are falling into the inheritance tax trap. The Treasury has tried to close many of the loopholes but there are still many things that individuals can do either to reduce or mitigate this. One of the most obvious is to ensure that any life insurance policies are written in trust and fall outside the estates.
Intermediaries need to encourage their clients, where possible, to make provisions in their wills for both husband and wife to maximise their inheritance tax thresholds. Investments such as holiday lets should also be looked at as they are exempt from IHT.
Hamilton: Across the country there will be around £2.5bn paid in inheritance tax this year. The average bill is around £78,000 (based on 32,000 taxpayers) so this suggests that individuals are not doing enough to protect themselves. Inheritance tax starts on estates worth over £263,000 and recent research shows that almost 2.5 million homes in the UK are worth more than that. It is estimated that this number grew by 500,000 in the first half of this year. In other words, every minute another two families have fallen into the tax trap without realising it.
There are many mitigation strategies, some insurance-based, many not. These will include reducing the liability or planning to meet the bill. Making a will is a start. IHT represents an obvious opportunity for IFAs to differentiate themselves from non-advice distributors such as supermarkets. Proper IHT planning requires a fund of knowledge and insight. There are basic steps that non-specialists can look at though, such as putting existing and new cover in trust.
Axa is thought to be preparing a guaranteed protection product. How feasible is a guaranteed product without a review after a fixed period?
Bennett: We are launching a new protection proposition in November and, as part of this, we are looking at offering customers the choice of guaranteed or reviewable rates. It can be a significant benefit for customers to have a guaranteed product but they need to consider a number of factors when making their choice.
Offering guaranteed rates is more expensive for life company providers due to current uncertainty about future critical-illness experience. Some customers may prefer much cheaper reviewable rates. Our experience of the market suggests that customers are willing to pay extra for the benefit of guaranteed rates. As a provider, we believe it is essential to offer the customer options so they can work with their intermediary to make the right choice. Therefore, guaranteed products are feasible as long as the customer is willing to pay for them.
Pardoe: From the consumer's angle, guaranteed products have many often overlooked drawbacks. The main one is the fact that the premiums payable on such products are based on the underwriting risk during the length of the guaranteed period while, in reality, most clients have a change of circumstances and, as a result, end up lapsing such policies long before the guaranteed period expires. The average length of a typical 25-year guaranteed life product is less than five years. As a result, clients end up paying more premium than they would otherwise do on a renewable or reviewable contract.
Furthermore, because the premiums are more expensive from the outset than those premiums payable on a renewable or reviewable contract, there is a tendency for consumers to underinsure at the outset. With a reviewable or renewable contracts, the customer can provide for the cover that they need today, knowing that while costs may rise in the long term, their income will rise accordingly, enabling them to afford this additional cover comfortably in the long term.
Hamilton: There is little doubt that the certainty afforded by guarantees is attractive to customers and IFAs. The difficulties with providing guarantees on critical illness are well documented and there have been suggestions that income-protection guarantees could be under threat, although, from our own perspective, we have no plans to remove them. Clearly, there is a cost to providing guarantees and, typically, the longer the term, the more expensive it is to provide the guarantee. With whole-life plans, looking at mortality, there is arguably more certainty in predicting claims' experience into the future and so guarantees can be priced for without making the product prohibitively expensive. CIC is less easy to predict and so we have seen a reduction in some of the guarantee periods. If products are to have review periods, the key is to ensure the customer understands the timing and potential impact of reviews into the future. Advisers would do well to document discussions on this.
With Skandia the latest to have to pull out from the pre-funded long-term care market, is the solution to longterm care options a covert one through disability benefits as part of a life insurance product?
Bennett: Evidence suggests that the grey population is already making provision for future care needs by alternative methods and that “saving for a rainy day” is a popular financial objective. One likely need for this rainy day fund could be long-term care. The immediate needs' products, which remove the risk of a customer wondering whether or not they will need care by providing a tax-efficient point-of-need solution, have flourished while sales of pre-funded products have flound- ered, resulting in providers exiting the market. The versatility of a balanced investment portfolio, including a defined “rainy day” fund, can provide older customers with a choice of options when the need arises. We do not believe that covert solutions are an option. This is a growth area and long-term sustainable solutions are needed.
Pardoe: The central problem with the pre-funded long-term care market in the UK is that the marketing has been pitched at the elderly population. Looking at European comparisons, the UK market has seen sales of less than 40,000 such policies while the French market has had sales volumes of more than 15 times this figure. In France, such products are sold to a much younger market place and are offered on the back of other products. The likes of Skandia have struggled to convince 65-year-olds that the benefits of long-term care insurance outweigh the costs, our own Living Care contract has taken the market by storm and has seen increasing levels of sales.
The average Universal Provident Living Care client is 41 years old and will gradually see their premium rise every two years as they begin to prioritise the need for long-term care as they get older. In such a fashion, they do not see a sudden jump in premiums. With Universal Provident's Lifeline Plus contract, which converts term insurance death benefits to disability benefits from the age of 60 onwards, the client sees a continuation of premium but a change in the priority of policy to one more akin with their requirements as they get older.
Hamilton: The LTC market clearly faces a number of problems, not least in terms of what the client can expect the state to provide. The risks of such a contract are increased as people not only live longer, but also live longer with illness. Improvements in medical care are continually inc- reasing this period, during which the impaired lives need more daily help, so requiring policies to provide more benefit. If products are to be bundled in this way it will be imp- ortant that the customer understands exactly what is and is not covered.
Are intermediaries adequately servicing the needs of the growing Third Age market? What more can they do and what are the key needs?
Bennett: This is an issue for intermediaries and product providers. The ageing population has brought a new collection of needs to the fore. Life expectancy is increasing, bringing with it the need for people to provide for themselves for longer and protect their finances from inflation.
Men need to be conscious of the likelihood that they may die before their partners. They therefore need to protect against leaving a reduced income and consider inheritance tax planning. Intermediaries have a role to play in ensuring the elderly market has access to the range of protection products they require. The growing awareness of the importance of providing solutions for the ageing population will result in increased focus in this area both by providers and intermediaries.
Pardoe: Intermediaries are clearly not fully servicing the needs of the growing Third Age market which is evidenced by the overall lack of sales of long-term care insurance and the like. The main issue is that most intermediaries fail to identify with this market place and the priorities and the needs that they encounter. As clients get older they generally become more conservative. They expect and require less risk and become more pedantic about their financial affairs. Security of income is at the forefront of their minds together with the need to provide long-term care for their families upon death. They become motivated about setting up educational trusts for their grandchildren, gifting away monies to their children and the like.
Hamilton: To do justice to such a question probably needs an article if not a book rather than a paragraph. Shifting demographics do though represent a massive opportunity for professional advisers. As a population, we are ageing, which presents a number of challenges not least in planning for pensions and long term care. IHT is self-evidently a problem for clients but an opportunity for IFAs. As mentioned in the answer above, there are many different solutions. It is worth considering, for example, gifting into a stakeholder pension on behalf of children and grandchildren. This reduces the estate. Even if the money cannot be touched until the children reach 50, it does mean they may need to fund less towards their pensions themselves, so providing them with an immediate benefit. Providing for care for a longer old age will be one of society's and the industry's biggest challenges.
Paul Bennett, protection marketing manager, Axa Life
Jon Pardoe,chairman, Berkeley Morgan Group and Universal Provident Peter Hamilton, head of marketing communications, Friends Provident.
Shelley Robertson, xx, Skandia
Nick Kirwan, head of marketing and product development, Scottish Provident Heather Armstrong, head of marketing, Scottish Equitable Protect