The fast-growing protection market is an example of an area where advice can be immensely valuable to consumers.
One of the most significant market trends during 2001 was the rush of providers seeking to gain a foothold in the market for protection products. Dismissed by some industry commentators as a last-gasp attempt by life insurers to offset the impact of stakeholder, this trend has nonetheless proved significant, with some entrants making real inroads and growing the overall market.
As with any growing market, in time we will see winners and losers. But the fact remains that numerous surveys have shown that the UK population is chronically underinsured when it comes to life insurance and other protection policies so it is a market with considerable potential for growth.
Compared with long-term savings and investment products, it may be argued that protection products are a relatively simple financial services proposition. In theory, consumers insure themselves and their families against death, critical illness and the inability to work due to long-term sickness in the same way that they insure their homes, cars and possessions against potential damage in the future.
Given the fall in life insurance rates in recent years, along with the growth in online sales of general insurance products, it might be argued that protection products will soon become as commoditised as motor insurance, particularly as this type of distributor frequently manages to offer very low rates on term insurance products.
The reality for many other protection products, however, is somewhat different. The low level of consumers who have actually taken out critical illness or income protection insurance points to a lack of comprehension of their vulnerability to illness and a lack of understanding of the types and range of products available. In both cases, independent advice can make a world of difference.
Many consumers prefer to avoid thinking about illness altogether and are left exposed when illness strikes and they are unable to work. When assessing their client's overall financial needs, advisers are ideally placed to demonstrate how, if a client's income ceases due to illness, other financial arrangements, such as pension contributions, will suffer a domino effect as a result.
While protection is important, most consumers have a limited amount of income to spend on it and, here, independent advice comes into its own. For example, many consumers may be tempted to purchase the cheapest term insurance product available on the market but this may be a false economy. By recommending a flexible product, advisers can ensure that their clients' expenditure is targeted on essential cover when money is tight but can easily be adapted to fit in with lifestyle changes, such as a promotion or increase in salary, growing the family and so on, and therefore purchase a product which delivers value for money over the long term.
It is also important to remember that, while home insurance may be relatively straightforward, there is underwriting involved in life or critical illness insurance and this may also make independent advice more desirable, providing guidance in a potentially complex area.
Advances in medical science have created a changing environment for protection providers and expert knowledge of the market can help consumers make informed decisions about the nature of the products they buy.
Many IFAs have already moved into the protection market, recognising its growth potentials. With the advent of depolarisation, whatever route advisers choose to take in terms of their own business development, it is certain that strong client relationships will continue to form the basis of success.
Recommending a flexible protection policy, which can be adapted to suit a client's needs over a number of years, is an excellent foundation stone in building enduring relationships which will ensure future business growth.
Peter Dornan is director of group businesses at Aegon UK
IFA UK is hitting the road over the next few months with the Money Marketing IFA UK exhibition and conference for advisers in England, Northern Ireland and Scotland.
At the next event in Glasgow's SECC on March 21, speakers include Financial Technology Research Centre director Ian McKenna discussing how IFAs can use the internet to expand their business and Financial Services Compensation Scheme chief executive Suzanne McCarthy will speak about its role in the market.
There will also be a debate for all delegates on how the FSA's move to scrap polarisation will affect IFAs and their clients. Tel: 0870 7594 019.