Why now is the time to talk about indexation
With clients continuing to face rising living costs and their purchasing power being eroded, futureproofing the value of protection cover has never been more important. If advisers ignore indexation, the level of cover they put in place will decrease over time - often without clients realising it - writes Nick Telfer, Protection Development Manager at Vitality.
With inflation remaining stubbornly high in the UK1, despite the Bank of England raising interest rates in an effort tackle spiralling inflation, many consumers are getting caught between a double whammy of rising living costs and increased borrowing costs.
As we know, the economy is cyclical and over a period of time inflation will see highs and lows – but even the Bank of England has had to admit errors in his inflation forecasting2. The current long-term reality is that ultimately living costs will likely continue to rise.
In the protection industry, the tool that we have at our disposal to help prevent our clients from seeing the value of their cover getting eroded by inflation is indexation. I would argue that this should be the default for every client looking to protect their own and their family’s future financial security.
“If protection advice is to remain relevant over the long term, then indexation must surely be a serious consideration in every conversation where level cover is being discussed.”
Without indexation, level cover is decreasing
Inflation of any level will erode the value of protection cover. Even with relatively low inflation of 3% per year, over 20 years the real value of £100,000 protection cover would be reduced to about £50,000.
At a rate of 8%, in just 12 months that £100,000 of protection cover will have lost almost £8,000 from its value.
If protection advice is to remain relevant in the longer term, then indexation must surely be a serious consideration in every conversation where level Life, Serious Illness or Income Protection is being discussed.
If it isn’t then that cover in effect becomes decreasing cover. This means that the value of the cover is reducing as the risk of claim rises which in my mind is totally illogical.
Prevent lapses and future-proof cover
One of the biggest challenges advisers and insurers face - especially at this time - is persistency. As with any purchase, we throw something away if we no longer deem it to be useful. Protection insurance which is having its value eroded away is no different.
By including indexation, the long-term value and relevance of advice and the resulting cover can be protected.
Additionally, indexation allows clients to buy the right to increase their cover every year without the need to re-apply for higher cover and provide medical evidence. This can offer greater value and flexibility for clients than guaranteed insurability options, that only apply when certain life events happen.
It should be highlighted as well that with income protection cover, once in claim the client won’t be able to increase their cover even if they want to. So, with indexation included, the value of that client's benefit payments will increase every year, for as long as they’re off work.
The value of this future insurability shouldn’t be under-estimated. The reality is that as we get older, we are more prone to developing medical conditions and potentially become less insurable.
Adding value to your advice
Maintaining the long-term value of a recommendation is a simple and effective way of demonstrating the value of advice. With Consumer Duty almost upon us, it’s also a way of ensuring good client outcomes and avoiding any potential foreseeable harm.
Looking at several non-advised consumer-facing websites, typically the only choices available to customers are for cover to stay the same or decrease. What this actually means is that the choice - in terms of value - is decreasing or decreasing!
With Vitality, the initial premium is reduced where indexation is included and, as recognition to advisers, we boost the initial commission we pay on plans which are indexed.
Enhanced long-term relationships
By including indexation in a recommendation, it provides the opportunity for advisers to regularly touch base with clients as the anniversary of their policy approaches. This can be a chance to remind them of the value of your advice; that their cover and premium will be increasing and the reason why. It might even identify new needs and opportunities.
If they don’t want to increase the benefit and premium for that year, it’s a chance to remind them that they can choose to keep their cover at the same level.
With some insurers, declining the indexation increase will remove their right to future increases. However, with Vitality we will continue to offer them the opportunity to index. In fact, we will only stop doing this if they decline three consecutive increases, whereas some other insurers have a ‘use it or lose it’ approach and remove indexation if it is declined just once.
Deliver tangible value
As the cost-of-living crisis rumbles on, households are understandably watching what they spend while weighing up the best way to save money for the future.
Most life insurance offerings only benefit clients either near to, or at the point of, claim. However, health and wellbeing benefits – such as discounted gym memberships, annual health checks, weekly coffee incentives and subscription savings – not only drive client engagement and help prevent lapses, but they can also help clients save money at a time when this is more needed than ever.
We’ll even show clients how much they’ve saved on their anniversary statements, alongside details of indexation increases. Convincing clients of the need for financial protection can be a challenge even when times are good, so it helps to offer something that they see tangible value in and want to use from day one.
Where to next?
Four ways income protection can flex to the changing needs of clients
As a client’s life and circumstances change, it’s crucial that any protection cover they have in place remains suitable for their needs.
Why now is the time for next generation insurance
At a time when the UK is facing numerous social challenges, from the ongoing cost-of-living crisis to immense pressure on the NHS, there has never been a more relevant time to go above and beyond the scope of traditional insurance.
Children need the right cover too
When it comes to protection conversations, getting some clients to consider their own needs can be difficult enough, but child illness can be an especially challenging conversation.
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