Following the Budget bombshell on unshackling pensions and beefing up individual savings, the way consumers look at their long-term financial planning will never be the same. This is fantastic news for advisers and could also provide a significant and timely shot in the arm for protection.
The Chancellor’s theme was people should be “trusted with their own finances”. By including protection, where customers have a savings objective, integrated protection can ensure the target is met, following disability, serious illness or death. Protection and regular savings are two sides of the same coin.
In the past the FSA raised concerns that bundling products may not be in the consumers’ best interests, as it causes confusion, and gives excessive market power to providers. However, where the products work together and there is an effective backbone of advice, choice and flexibility, the benefits can outweigh the concerns.
This is not the mortgage endowment phoenix rising from the ashes. The range of investments, the quality of advice, remuneration and charging transparency have moved
a long way from the late 1990s.
Protection can now be integrated with different investment tax wrappers and a wide range of funds, or a wrap platform and can be used to protect the gap between the target amount and current market value.
This is a very efficient way to purchase protection, as the client pays a daily risk charge, equal to the fluctuating but diminishing cover gap, taking into account their contributions, withdrawals and portfolio performance.
The fusion of savings and protection also opens ways to combine self-insurance and insurance. A savings vehicle could provide a pre-determined amount of self-insurance to reduce the level of protection. In this way, the consumer accepts a quantifiable amount of risk before the insurance steps in. So the accumulated fund could be used to cover, say, the first six months, or £25,000 of unemployment, or occupational disability, after which the insurance is triggered.
In the US, Health Savings Accounts combine a savings plan with private medical insurance subject to a high excess of, say, $3,000. Customers use their accumulated fund to self-insure the out-of-pocket costs and the insurance covers the balance. These accounts can also be used to cover families.
This is a fantastic opportunity for platforms to extend into protection but this will not succeed without making the sales experience considerably easier. Platforms transformed investments by placing the advisers in control of their client experience, with access to information and tools. They could do the same with protection.
In my last column I asked where will industry’s next innovations come from? This may in part have been answered in the Budget.
Martin Werth is managing director of Underwriteme