The protection market has had some challenging times over the last 12 months as reinsurers withdrew from the market, prices increased for critical-illness cover and the product definitions changed to target cover at conditions with significant lifestyle impact.
As a result, sales for most protection products have fallen quarter on quarter as affordability and adviser confidence have been affected.
Meanwhile, the life-only market has continued to thrive as price competition has remained intense and consumers have retreated into buying the basic cover only rather than protecting the full range of their mortality and disability needs.
However, the statistics tell us that customers need more than pure life cover. For example, one in three people will develop cancer in their lifetime (Office for National Statistics, June 2004) and about two million people have been claiming incapacity benefit for more than one year (Department for Work and Pensions, February 2004).
One option is to look at family income benefit policies rather than traditional lump-sum arrangements. Consumers find it easier to understand the income they need to replace rather than some complicated multiple of income calculation. By targeting the cover to a specific duration, costs can be significantly reduced.
For example, for a male and female both aged 35 next birthday earning £24,752 a year, providing £100,000 of joint life level life or earlier critical illness over 25 years on guar-anteed rates could cost £89.58 a month.
A joint life family income benefit on guaranteed rates increasing with inflation, paying £5,000 a year for 25 years (the equivalent of income generated from £100,000 over 25 years at 5 per cent interest and 3 per cent inflation) could cost £57.80 a month.
Alternatively, a more bespoke package of benefit cover can be created. This could effectively create more cover for less by giving a combination of life, critical illness and income protection products.
Using our same couple, cover for joint life level cover only could cost £15.19 and two single life policies could cost £19.90. However, they still need cover should either of them suffer a critical illness. If we arranged for, say, one year's salary, this would cost £24.35 as a joint life guaranteed pol-icy or £29.56 for two single policies. This would also include valuable children's cover on both policies.
However, if the illness was to require treatment causing a long-term absence from work, critical-illness cover is unlikely to provide enough benefit so we need to add an income protection policy. If we assume a 52week deferred period and cover of £12,000 a year on guaranteed rates, the total cost for both clients would be £34.70.
So lets summarise what we have suggested (see table below). A lot more cover and still cheaper than the original £89.58 for a level critical-illness cover policy at four times salary. The total cost could be reduced initially by using reviewable rates on the critical illness to £67.86 for joint life policies and £77.16 for single life policies.
With affordability likely to be an issue for the foreseeable future, building more tailored packages such as this will help clients get the cover they need for the events they are most likely to encounter without breaking the bank.
All figures are provided by Legal & General from The Exchange as of September 6, 2004.