Protection; Fixed Fee V Commission

If I had known of the importance of life insurance, critical illness cover and income protection at the age of 20 I’d have put all of them in place for generous amounts of cover that I probably could’ve benefitted from multiple times by now. What’s more the premiums that I would have been charged on a guaranteed basis would’ve been paltry to what the same level of cover would cost today.

Unlike pensions and investments, most advisers still get paid by way of commission when advising and arranging a protection policy. Rarely do customers realise that the cost of their premium is higher because of the commission that is paid to the adviser. Nor do they realise that over the term of the policy they would’ve paid the life office many times more than the commission paid out.

There’s not really any more work being done for putting in place a £500 per month policy than there is for a £50 per month policy but the commission advanced could be enormously different.

I think it’s fundamentally important that customers are given a choice and its not enough to present that choice at the initial meeting but rather when customers are presented with an illustration, they are also given an illustration that’s non-commission based.

If customers could see that their savings over the term of the policy would be many thousands of pounds, they could be willing to pay a fixed fee. There are other advantages too:

• Customers would be less likely to cancel due to more affordable premiums
• Customers would be less likely to cancel since they’ve spent fees directly from their own ‘pockets’
• There’d be more emphasis on the quality of the product than the cheapest
• Advisers wouldn’t have to worry about ‘clawback’ of commission should there be cancellations within 2-4 years dependent on the life office

It also feels more equitable charging for professional advice to the customer as opposed to relying on a generous commission payment from a life company. It’s regulation today that stops the abuse of it, but there’s something to be said for the sake of having the correct advice processes from day one that’d avoid or lessen the need for customer reliance on regulation that ironically ends up costing the industry more over the longer term through increased PI cover and the FCA levy.

As for the quality of cover, I think there should be far more emphasis being made on how cover differs between providers.

Critical illness and income protection are not like car insurance and I feel it’s important customers are given clear advice how providers can differ in terms of the breadth of conditions they are willing to provide cover for, exactly how strict or generous those definitions are, and of course statistics around pay out rates and customer service.

Financial products have come a long way since the days they were peddled by distributors as opposed to today which is increasingly by highly qualified advisers who look at how to structure a plethora of financial products appropriately and protection is no different as its unlikely customers left to their own devices will know about the following 10 things:

1. Importance of putting protection policies, including critical illness policies at times into trust
2. Importance of structuring policies with cover over £325,000 as multiple policies
3. Knowing the implications of putting joint life first death policies into trust
4. Not to over or under insure
5. The difference between ABI and ABI+ definitions
6. The breadth of coverage
7. The add-on benefits providers offer
8. Implications of setting up a joint policy as opposed to two single policies
9. Using whole of life protection policies to mitigate inheritance tax
10. Using protection policies to cover the tax liabilities that may be incurred on a lifetime gift

Advisers today should now legitimately and confidently be able to charge a premium for the advice offered especially because the value such advice adds throughout the course of a customer’s life often means avoiding numerous pain points they are statistically likely to have by retirement as well as optimising the growth on their savings and investments.

Mohammad Uz-Zaman is a private client trust and estate planning consultant who holds accreditations across regulated financial advice and estate planning. He holds graduate and post-graduate degrees and he is also a member of the Society of Trusts Estate Practitioners. He works closely with financial advisors from several major practices.