Is it time for a hierarchy of protection needs?


November 11, 2013

Mark Jones is head of protection at LV=

Term life cover outsells income protection by around eight to one (according to the Swiss Re Term and Health Watch 2013). But do eight times as many people die every year as those who take six months or more off work due to say an illness or stress?

And likewise nearly twice as many life policies are sold compared to critical illness cover, but an average male non-smoker aged 40 is twice as likely to contract a serious illness than die* 

Perhaps it’s a case of advisers finding their clients more engaged with life insurance because people accept they will die, they are more familiar with it as a product or perhaps it is simply because it is cheaper than other products even though these may arguably better suit their financial needs. 

Has the protection universe become so complex that customers are baffled not only by the choice of products on the market but by the varying types of cover offered?  Or do the vast majority of clients simply take a gamble that their income will remain intact by remaining ignorant (intentionally or otherwise) of the statistics surrounding accident, sickness or even unemployment.

Perhaps people would be more likely to buy the most appropriate product if they understood the likelihood of each event happening – arguably unemployment, followed by sickness, followed by a life threatening illness, followed by death.  A means of highlighting these different risks would allow the client to be presented with a protection hierarchy enabling them to see at a glance which products they are most likely to need based on their individual profiles.

If such a hierarchy existed it might say that income protection and critical illness cover are more important than life cover, based on the realistic likelihood of claiming. However some might argue that death has the greatest financial consequence i.e. total loss of income forever and people insure themselves for the risk with the greatest possible negative outcome.  But what is important to note here is that a protection hierarchy should not exist to help advisers recommend one product over another. Even if income protection might be the most pressing ‘need’ it be a mistake to recommend this whilst forgoing life cover altogether.  In most circumstances, there are ways to include various elements of cover within a client’s budget with different weightings for each product depending on their personal circumstances. That way all aspects of financial risk could be covered.

When considering any form of protection, financial planning and risk analysis are essential. A protection hierarchy would help inform consumers about risk and likelihood of outcome but as there is no ‘one size fits all’ solution for everyone, any hierarchy would need to be tailored to each individual client rather than being static, based purely on industry statistics on death, illness and unemployment.  A hierarchy of needs combined with thorough financial analysis should take into account certain important client details.  Information like the financial and physical health of the individual, their age, whether they have dependents, what financial commitments they have, whether they are in regular employment and if so how much they earn, what protection their employer provides and what they can afford etc. should also be considered.

The reality is that financial protection in any form is still a low priority for most people. Ignorance is bliss and most people would prefer to ignore the potential risks and keep the extra pennies in their pockets regardless of the likelihood of ill health, death or unemployment. Financial advisers and product providers have an important role to play in raising the awareness of the potential financial risks to their customers and clients and consequently the solutions to help mitigate them. To help tackle the problem LV= has launched a Risk Reality Calculator which has been designed to aid discussions with clients and make the statistics around risk more personal. 

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