Insurance World

Most people are aware of how life insurance works and what are the events and dangers that it is designed to protect against. They may also have family commitments and people who they provide for and know that some sort of life insurance would protect their family financially, if something were to happen to them. However, it is still often a very difficult decision to make if you are trying to decide whether or not you need life insurance.

Life insurance is a big commitment financially speaking. The premium can vary in cost but can be considerable, then there is also the issue that life insurance often extends over many years, even decades. This means that not only are you committing to pay the premium for this year, but also for many years into the future. There are not many people who can say with certainty what their earnings will be in ten or fifteen or twenty years time.

There are also early termination penalties, which means if you want to end the policy before the expiration of the entire term, you will be financially penalised. This is generally more relevant for life assurance but can also apply to life insurance if your rate has been calculated on the condition that you remain insured for so many years into the future.

If you have life assurance, then it will also be a method of saving for the future. This is a very popular concept, especially these days with the growing concern about the state of pension funds, but it again deserves careful consideration. There are many ways to save for the future, and by deciding to do so by way of a life assurance policy still entails deciding that life insurance is something that you want and are willing to pay for. If you do not need life insurance, then there are probably more efficient ways of saving for retirement than with life assurance, which places a proportion of your savings against the insurance aspect of the policy.

In general, most people will really only be considering life insurance if they have a family to support. This can be a spouse and generally children. However, situations frequently change, people get divorced, and children always grow up and become independent. If your family situation is likely to change, you should familiarise yourself with the ways you can end the policy early and what penalties would apply. However, if you have a young family and are concerned about their financial security for the future, then life insurance will be a great opportunity for you to provide for these concerns.

THERE has been so much written in the past few months about payment protection insurance it has all become a little confusing. Most of what has been written has been very negative, indeed dangerously negative – witch-hunt proportions even in some quarters. A mortgage magazine even ran a campaign to have single premium accident, sickness, unemployment banned.

Amid all the chest beating and promotion, some clarity is desperately needed. Without relevant PPI being offered to customers, there is an even greater risk of one of the fundamental objectives of the FSA not being met – and that is protecting consumer interests.

The PPI witch-hunt has also lumped together mortgage payment protection insurance and single premium ASU. These products are, of course, all very different. Most of the Office of Fair Trading’s concerns re- volved around the potential mis-selling of PPI related to consumer and revolving credit sales, not mortgages.

In November 2005, the FSA published a report detailing its findings about the sale of PPI. This was backed up with mystery shopping of various firms involved in the sale of PPI – that goes beyond mortgages to other companies that offer revolving lines of credit, store accounts and unsecured loans. It was much broader than the mortgage industry alone and, given the mortgage industry has been regulated by the FSA for some time now, it has taken a disproportionate amount of flak.

Experience

It does strike me as odd that people who have very limited experience in the mortgage market – and more specifically experience in the sub-prime mortgage market – have been pontificating about the so-called evils of single premium ASU.

The mortgage industry as a whole needs to assess the risks and benefits – yes, benefits – of single premium ASU with calm heads, because things have moved on.

Fact one. Sub-prime clients cancel their monthly ASU policies. Some major insurers have even withdrawn the product from sale because the persistency levels are so low. That is what sub-prime clients do. It is the same reason they cancel their life policies. That does not mean we should stop writing life business because we would be leaving customers and their families exposed.

There is a fundamental issue here. Why sell a client a monthly policy when he has a demonstrated history of not being able to meet his monthly commitments?
And guess what? Fact two: sub-prime clients will cancel their monthly ASU policy at the time when they need it the most. The potential ramifications for the IFA/mortgage broker are dire should he be unable to demonstrate that he offered his client the option of either monthly or single premium ASU and it has subsequently gone pear shaped for his client.

Some brokers detail the costs and benefits of ASU in the suitability letter and document in that letter if the client has chosen not to take it up. Some go even further. For clients who cancel their policies downstream, some brokers send a disclaimer ensuring they know what they are cancelling and detail the ramifications of having no cover.

It is cheaper to do that than risk the potential of attracting a lawsuit, and worse still drawing bad press to our business and brand.
There is no doubt that single premium ASU policies have come in for some major flak because of their poor flexibility and TCF unfriendliness.

Commission

Agreed and rightly so. One of the key issues at play here is the seemingly large commission payments made for single premium ASU.

Let us look at that issue in another context. What if a motor insurer offered a three-year product and guaranteed not to change price over the term with no inflationary creep? What if you got a further discount for paying that policy upfront as a lump sum? Of course, the selling broker would be paid his share of the total premium.

Single premium ASU is not really that different; it is just that a lot of commentators have got all bent out of shape about the commission payment and not the cover itself.

This problem has been further magnified by lots of people throwing their twopence into the ring when, to be frank, objectivity is needed and recognition of what has changed. There is a place for single premium ASU, but not as we used to know it.

What if the mortgage industry had a single premium ASU product that had the following features:

- provided no quibble pro-rata refunds if it was cancelled;
- where the premium was established using a risk matrix factoring in age and employment type – similar to the way life premiums are calculated;
- where you can sell the accident, sickness and unemployment components independently of one another based on the customers’ individual circumstances;
- a product where you can factor in the client’s own savings and existing employer protection policies to reduce the cost of the policy in line with risk;
- where you can defer the benefit payments by up to six months and be paid retrospectively in a lump sum;
- where you can change the policy mid-term, in other words the amount of cover can be increased or decreased or names on the policy can be changed without penalty; and
- where the true cost including capitalised interest of the single premium ASU is disclosed pre purchase – to comply with treating customer fairly and Insurance Code of Business 5 rules. Indeed, all the product limitations, pre-existing conditions and exclusions are disclosed pre-purchase.

What if this product existed and its makers had worked closely with selected players in the mortgage industry to ensure all regulatory requirements were met and exceeded?

Well, I hate to say it but that is the product that one broker has sold – and the intermediary has their FSA visits and, as with others, single premium ASU and its sale processes were heavily scrutinised. No problems. Perhaps some of the single premium ASU providers may wish to read the above product features just one more time.

Protected

Let us look at another angle. Surely lenders, particularly sub-prime lenders, have a duty of care to ensure that their clients needs are protected.
The stated objective of many in the mortgage industry is to ensure their sub-prime clients are “credit cleansed”.

So without any cover, they miss a mortgage payment or two or three and they are stuck with sub-prime rates for another year or two. All of a sudden that single premium ASU premium is not looking so expensive.

Things can and do go wrong, and it is our job as qualified professionals to ensure our clients’ needs are protected.

The Association of Mortgage Intermediaries has now responded to the FSA’s request to address its concerns about PPI and I am sure that will be the start of some more sanity in the discussions surrounding its sale.

Single premium ASU is not about preying on desperate clients. One broker has developed a process that is FSA and TCF compliant and sells products that are appropriate to individual needs.

There is no doubt that the adverse publicity surrounding PPI sales has eroded not only consumer confidence but the confidence of IFAs and mortgage brokers to sell insurance cover that few could argue against.

Most of all, it is important to note that the industry has responded and moved on. Some people need to move with it.