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Advisers turn attention to life insurance

More financial advisers are expected to start selling life insurance next year so they can continue earning commission as their other sources of revenue dry up.

From January 2013, financial advisers will no longer be allowed to receive commission on sales of investment products such as ISAs and pensions. They will have to charge fees instead. Surveys indicate many investors may not be willing to pay fees and will make their own decisions.

However, advisers will still be able to get commission from selling protection policies such as life insurance, income protection and critical illness cover.

Insurance companies can pay as much commission as they like to advisers and comparison websites to attract protection business. Some already pay more than others, or pay higher commission to advisers who put larger volumes of business their way.

The potential shift in emphasis towards protection selling is seen as welcome by insurance companies. Mark Jones, head of protection at LV=, says: "It has got to be a positive thing if more people are being sold the protection policies they need."

In recent years, this type of insurance has been undersold. Financial advisers, banks and building societies have concentrated on more lucrative products. Because protection insurance tends to be something which is sold rather than bought, it has meant the UK's population has become under-protected against financial hardship as a result of death or illness.

Over the past 10 years, the life assurance protection gap for the UK has increased by 20% from £2 trillion to £2.4tn according to Swiss Re. On average, this gap amounts to around £100,000 per person, with the amount of under-insurance greatest among single parents, couples with children and those aged 35 and under.

Ian Smart, of Edinburgh-based protection insurers Bright Grey, says: "We think that more advisers will start talking about protection because their clients may not be willing to pay fees for investment advice and they will need to make up their cash flows.

"But we see this as a welcome development because protection should be the cornerstone of everyone's financial planning."

However, specialist protection advisers have expressed concerns about other advisers, with limited expertise, piling into protection. Matt Morris of Lifesearch warns: "There is a risk they will sell life assurance to make money but will not add any value. They will not explain the merits of income protection insurance for example."

Many protection experts say income protection must be taken out before life assurance as people of working age are more likely to fall ill than die, and these policies provide replacement income during sickness. Mr Morris says: "Income protection is quite complex and can be more time consuming to sell. So if we find in two or three years' time that sales of life insurance have risen, but sales of other types of protection policies have continued to fall, it will not be a good sign."

Professionals argue that commission payments on protection policies do not negatively impact consumers because the cost, in the form of the premium, is transparent. Mr Smart says: "There is strong competition between protection insurers so companies could not afford to pay huge amounts of commission otherwise their premiums would have to rise."

Insurers are currently preparing to implement new rules from Europe which mean they will have to charge men and women the same premiums for life assurance and other protection policies.

This is expected to lead to generally rising premiums. However, the main impact of these rises will be on the re-broking of existing business. Due to falling prices in recent years, many consumers have been encouraged to switch to cheaper policies.

The rises are expected to have less effect on new policies sold as research shows that protection insurance is typically not as expensive as people think. Mr Jones says: "Consumers overestimate the cost of life insurance by a factor of two or three times."

This did not stop the chief executive of Zurich's UK life arm from calling on the Government recently to introduce tax breaks for protection.

Gary Shaughnessy, the former head of Fidelity in the UK, wants the Government to investigate the idea as part of encouraging people to take responsibility for their financial security. He thinks people should be given tax incentives to buy protection policies in the same way as they are to encourage them to put money into pensions and Isas.

In the past, tax relief was given on life assurance premiums but it was abolished in the 1980s.

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