A beneficiary wanting to invest a lump sum is not going to get much of a return right now.
FIB has many advantages. The first is that premiums are lower – on average 35 per cent cheaper compared with an equivalent level term policy. This allows clients to either pay a lower premium or give their family a greater level of protection.
For families, the FIB shape works well as their need for cover generally fades as children grow up and wealth accumulates.
Even if interest rates are good, investing a lump sum can be a daunting prospect. A regular tax-free income that matches the income brought in by their late partner or parent is easy to manage and is one less thing to worry about during a very difficult period.
Many consumers know their family members are not experienced with money and FIB avoids risk, complexity and costs. It also means the beneficiaries cannot blow a lump sum in the early years and be left struggling later on.
So why do so few clients end up with FIB policies? Public awareness is low so it has to be sold. Clients who do not get advice do not get to know about FIB and even those who do are often not told about it. Advisers find it harder to explain and the name of the product often puts people off as it sounds like a state benefit.
Clients are also seduced by the thought of a lump sum, without thinking about how that lump sum is going to pay for their family’s everyday needs for what could be a long time.
And there is another, shameful reason. The best-laid plan to protect a customer’s family with an income is often thwarted at claim stage. Providers offer the option to commute the benefit into a lump sum. Without advice, beneficiaries do not know the advantages of getting an income and often go for the tempting lump sum.
This reduces a provider’s admin costs but may not be treating customers fairly and many advisers feel that taking the time to explain FIB to a customer is pointless if the beneficiaries are likely to end up taking a lump sum anyway.
FIB is a great credit crunch option for many customers. It is also a good way for advisers to compete against the non-advising sellers. Providers should help raise the profile of FIB and do more to help advisers sell it. The practice of commutation should also be rethought so that customers know that their families will have the regular income they want them to have.
Emma Thomson is head of life office relations at Lifesearch