Recent articles arguing against life insurance have broken the link between protection and holistic financial planning, Simoney Kyriakou suggests
Social media posts rarely unify everyone, but a recent story suggesting that people should make regular investments instead of paying premiums for insurance got advisers talking.
In response to the article, many brokers went the extra mile to promote the message that protection is essential to financial health.
For example, as reported in trade title FTAdviser at the time, broker I Got Cover teamed up with TV fitness guru Derrick Evans MBE – aka Mr Motivator – to help get people talking positively about life insurance.
Advisers such as Haresh Raghwani, wealth manager for Craufurd Hale Wealth Management, believe having that conversation as part of a holistic financial plan is vital.
He says: “Clients need to be educated about how protection can play an important part in their overall planning.”
And it does not matter how wealthy the client is, says Alistair Cunningham, financial planning director for Wingate Financial Planning.
“There is an assumption that wealthier people need less cover. The reality is that death can mean a radical change to [the survivor’s] lifestyle, as most people build a standard around them based on their means at the time,” he explains.
Mr Cunningham adds: “Unmarried couples are particularly at risk, as assets like the family home can incur inheritance tax (IHT) on death, meaning the survivor is faced with an immediate liability and they may not have the liquid assets to cover the liability.”
For many advisers, therefore, it is not enough to focus on helping clients achieve the maximum possible pension pot or investment portfolio – it’s about protecting it, too.
Oliver Rayner, managing director at Caspian Insurance, explains: “It is not always what people think of when they are going to see a wealth planner, but it is crucial to protect them and their family against potential loss of income.”
Jiten Varsani, mortgage and protection provider for London Money, says this protection also needs to extend into retirement and beyond, and should be part of later-life planning.
For him, because the main feature of a pension is to provide a retirement income, a life insurance policy can allow the pension to remain for the beneficiaries “without the need to surrender the pension to meet financial needs at that time”.
By putting life insurance policies into a trust, any payout will not be included in an individual’s estate and therefore, will not be subject to IHT upon death.
This could provide tax-free income until such a time as income from a pension is required.
Tim Holmes, managing director at Salisbury House Wealth, says: “This could be particularly beneficial as the government looks to make up for money it has spent during the pandemic.”
Mr Cunningham also thinks this could help with complicated estate planning: “Legacy through life policies can give the best of both worlds: control over who receives money without the IHT implications of direct gifting.”
Mr Varsani also recommends using a full-term income protection policy that lasts until the client’s chosen retirement age, so if the client becomes seriously ill, pension contributions can be maintained, ensuring a “continuation of retirement planning”.
However, Mr Holmes adds the caveat that, because life insurance cover “needs to maintain its value over time to benefit individuals”, care is needed.
He explains: “Quite often, people include their life insurance into their pension plans; however, this runs the risk of impacting their lifetime allowance, especially for high earners.”
For those less wealthy, Mr Raghwani points out another benefit of using life insurance.
He says: “If the spouse/beneficiary has debts, then rather than using the pension fund itself, life cover could provide them with the funds to put them in a better financial position.”
Advocates of protection think it is bizarre that some wealth planners avoid giving advice on cover.
Kathryn Knowles, managing director of Cura Financial Services, comments: “Protection insurance is almost seen as ‘beneath’ a wealth adviser's remit.
“It is nowhere near as profitable as focusing on the wealth side of things. I also think it can be tricky in terms of fees, as wealth advice is not commission-based and protection is.
“The adviser needs to decide if they want to amend their fees to cover the time they took to sort the protection insurance, or come up with a dual pricing structure, which could cause a mess in terms of transparency for customers and compliance.”
There is also complexity: knowing which company covers certain conditions requires a level of research many wealth advisers do not have the time to carry out.
According to Mike Donohoe, strategic development director for Caspian Insurance, professional partnerships with specialist firms are a great solution for those wealth planners that do not have insurance expertise.
He says: “This gives the client the best outcome, rather than having one person or firm try to do everything.”
Lastly, there is the client. Mr Holmes comments: “Clients may think they do not need cover simply because they are wealthy. We would advise against this.”
Of course, not every client will require protection with retirement planning. But the adviser’s role is to establish whether or not that need exists – and that involves having that conversation as part of long-term planning.