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Terms of engagement

Low-start protection could entice people to take out cover but distribution and product engagement is more important

The aftermath of the recession and the Government cuts are providing consumers with many reasons to make savings in their everyday expenditure. This means that taking out protection products has dropped even further down the list of people’s priorities.

However, providers are still trying to be innovative by launching new protection products. For once, we even seem to have gone beyond the simple addition of critical illnesses to the already long list and are seeing new ideas emerging. One company has launched a product based specifically on school fees planning.
Others have set up term insurances with low-start versions.

The concept of a low-start financial services product is quite an old one. The now discredited mortgage endowment always came with a low-start option, whereby the client paid a lower premium in the first year. The monthly amount would then increase every year for the first five years. From year six, the client would then pay the same premium for the rest of the term. Given that endowment premiums were quite high, the low-start option was useful in helping people keep costs down.

But is a low-start option for term insurance as useful? After all, term insurance premiums are currently lower than they have ever been, so it is not as if the product is unaffordable. Just £10 a month can buy someone who is well into their 40s up to £200,000 of life cover. Do people really think this is so expensive that they need to be further enticed by a low-start option?

While market conditions have resulted in such value- for-money prices, consumer demand for term insurance has not increased as would normally be predicted by the laws of supply and demand. So is off-ering a product that further reduces the price of something that few people seem to want going to succeed where market forces have failed?

On the whole, it is not the price of term insurance that is the problem. Although there might be a perception among the public that it is expensive (many people really have no idea how much life cover costs and are often surprised when they find out how cheap it is), it is lack of desire for the product that is the problem.

A low-start option will undoubtedly offer more choice and flexibility when it comes to paying but it will not over-come the inherent problem that life insurance has to be sold to customers. They rarely go looking for it themselves.

Another way of reducing the price of the cover would be to offer the client a shorter term. The average time that a term insurance policy remains in force is seven years but most are written for 25 years or more.

Setting the term to such a length is sensible when there is a mortgage to be protected but the fact that most go off the books early makes a mockery of this somehow. Perhaps we need a product model that is more akin to a house contents policy with a guaranteed renewal option every year but without the expense of reserving for a full 25-year term.

This idea does make sense because each year customers should be thinking about their needs and making a choice about the level of cover they require for the forthcoming year. Also, an annual approach seems to resonate with the “pay as you go” attitude that many consumers are exhib-iting at the moment.

Even though the reduction of price for term insurance, the development of low-start products and the possibility of even cheaper annually costed solutions suggest that price is the only consideration, the reality is that distribution and product engagement are far more important.

Roger Edwards is propositions director at Bright Grey and Scottish Provident

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