Menu-based healthcare and insurance packages could be even more attractive if they allow income protection cover to be converted into long-term care insurance.
Although a recent arrival on the UK financial services scene, the menu-based life and healthcare insurance package accounts for a major share of total protection sales.
It brings advantages for advisers and clients. For the consumer, the benefits include flexibility, convenience and potential savings in premiums.
The products are highly adaptable, enabling the various cover components to be tailored initially to meet identified individual needs. But this is just the start. 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 their protection levels without having to provide fresh information about their continuing good health.
The client should also find it much more convenient maintaining one all-embracing pack-age of policy documentation rather than having to keep track of a hotchpotch of paperwork for different plans arr-anged with a variety of prov-iders over a series of years. Having a single direct debit instead of a number of separate mandates may bring savings in bank charges.
But there is another way in which menu-based protection can save the client money. The price of the product should include a single policy fee instead of the three or more that would be levied for separate plans. Bear in mind, too, that for contracts where the focus is on protection, the policy fee can have more of an affect on the total price than the basic premium rate.
Convenience is also a factor for the adviser. There are obvious admin 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 very recently, the main thrust of the marketing message has concentrated on components offering critical-illness cover, income protection and life insurance. A wai-ver of premium facility has been an integral part of the package as well. I believe, however, that there is a strong case for adding long-term care insurance to the menu.
What I have in mind is this. Clients, with their advisers to guide them, apply for IP cover which will continue throughout the rest of their lifetime rather than cease at a planned retirement age. The component starts off in a fairly conventional fashion but the nature of the protection offered chan-ges to LTCI when the individual retires and the pension takes over from earnings as the main source of income.
During the initial IP stage, the definition of disability depends on whether the client is working and earning and, if so, the nature of the job they do. For most people in white-collar positions, it will be a case of inability to carry out one's “own occupation”.
For those engaged in certain generally more physically demanding types of work, a more stringent “own occupation and any other occupation for which you are suited by way of education, training experience and status” description may apply.
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 those whose main duties are looking after 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.
There are three modes of premium payment on offer. A client can select renewable cover where the price is recalculated – based on the client's age and the rates prevailing at the time – every five years.
Option two is the most exp-ensive of the three. Premiums are fixed at the same level throughout the policyholder's life. The third option is a variation of the second option. The key difference is that the premium basis is reviewed at five-yearly intervals. Any changes will depend on factors such as claims experience and the returns available on policy reserves but not on the individual's age.
When the policyholder attains the watershed age at which they originally planned to retire, the nature of the cover changes from IP to LTCI. There is now only one definition of incapacity. Although this is based on the inability to perform three 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 or to someone with the enduring power of attorney to act for them or to the care pro-vider – 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 costs of care.
One issue for the adviser to take into account when considering this innovative component of the menu-based life and healthcare insurance protection package is that premiums will continue into the client's retirement.
It is essential, therefore, that there is sufficient pension and other income available to absorb the expense.
Research by Bupa into attitudes among its customers revealed that the demand for LTC certainly exists, with as many as one in three of those questioned expressing concern about how they would manage when they become too old and infirm to cope without help, yet sales of LTCI plans in the UK remain woefully low.
The challenge that is facing insurers on the pre-funded side is, how can we encourage the public to start planning earlier in their lives well before premium costs rise to an unaffordable level? IP into LTC, within a menu-based life and healthcare insurance protection package, provides just such a way.