Financial protection

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To give appropriate advice it is essential to fully assess the client’s personal and financial circumstances to ensure that all the key factors influencing needs and requirements can be identified.

Age

Clients will have different requirements as they get older. Younger clients are likely to have a dependent spouse and children. They are also likely to have a higher level of debt, such as a mortgage. Older clients may now live in a home that is free of debt and their children may have flown the nest. They are more likely to be looking for solutions to protect their wealth (for example from a future inheritance tax liability).

Marital Status

Whether the client has a spouse or civil partner, whether they are unmarried and in a long term relationship or whether they are single. Consideration should also be given to any planned changes to their status.

Children and dependants

Are children financially dependant and how long will this dependency last? Many clients have dependents from previous relationships ...

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...all the client’s liabilities as these will reduce the value of the estate left to the beneficiaries. The amount, duration and terms of all liabilities should be established to identify those which would continue after death and the amount required to sustain credit agreements during periods of disability or unemployment. If the client runs a business there may be other liabilities in relation to it.

State benefits

Consideration should be given to the eligibility of the client to claim state benefits, while maintaining awareness that the Government has a long-term objective of cutting the cost of these to reduce the current annual expenditure from the National Insurance fund of £100 billion each year.

Existing policies

Full details of all existing policies should be obtained and verified. The current plans should be tested against current needs and objectives to consider their continued suitability.

Why is it important to establish the type and source of all income?

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Risk is not usually associated with protection products, but there are some risk elements that should...

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...rofile will have a huge impact on the suitability of any products considered or selected to address needs.

Quantifying the amount of cover required is not an exact science; however, a structured approach to assessing the needs of the client is more likely to provide a better result than a “one size suits all” approach.

It is also important to distinguish between the different needs and requirements in the event of:

Death

Illness or disability

Unemployment

Quantifying life cover

The following process can help to quantify the amount of cover required on death:

Step 1 - Calculate short term capital needs

Step 2 - Calculate long term income needs

Step 3 - Calculate short term income needs

Step 4 - Deduct any existing cover and establish any shortfall/surplus and calculate the sums assured required

Short-term capital needs

These are the capital amounts that would be required immediately following death and could include:

Funeral costs, which average around £4,000

Emergency funds - bank accounts and other assets may be frozen pending probate, so an amount of money may be required to meet day-to-day expenses until the estate is released

Debts and mortgages may become payable immediately on death

Any outstanding tax and taxes incurred on death, which could include self assessment income and capital gains tax as well as any IHT due on the estate

Any specific bequests made in the will outside of the immediate family will reduce the amount of capital available. This could be a bequest to charity or business assets left as part of a shareholder/partnership agreement

Long-term income needs

This is the cost of providing for the surviving spouse or civil partner and any long-term dependants, the costs of which are likely to last for their lifetime.

Examine the family’s current expenses

Deduct any expenses that would cease on death (e.g. mortgage payments)

Deduct the costs associated with any children

Alternatively, calculate the minimum expenditure needed

Having established a baseline, deduct from this amount any income that would continue to be paid such as spouse’s ...

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... number of claims, whereas CIC will payout on the first event and then cease

CIC pays out a lump sum where as IP pays out an income

IP is based on salary where CIC is not. Where salary is low IP benefits will be restricted; CIC benefits will not

CIC pays out on diagnosis of specific illnesses or conditions, where as IP pays out on the inability to work regardless of the illness or condition (apart from plan exclusions)

CIC lump sum could also be used to fund for retirement income. Where IP benefits are being paid, the ability to pay pension contributions is restricted to £3,600 per annum (unless client has waiver of premium in place). It is likely that employer contributions would cease and therefore retirement planning would be affected

Redundancy and unemployment

Clients should plan to have some emergency funds available in case they lose their job, though the most important financial planning exercise in these circumstances would be to reduce costs.

During periods of unemployment, income is likely to be sourced from state benefits, savings and possibly redundancy or unemployment insurance.

Prioritising and affordability

Affordability is a very important factor. There is little point in producing a recommendation if the client can not afford to buy the product (or keep up payment of premiums). An adviser needs to establish how much disposable income their client has.

Once a suitable range of protection products have been identified the adviser will arrange to get a quotation done to find the best priced product which includes the features that the client needs.

Again, it is a fairly obvious point, but if the adviser needs to prioritise the products because of affordability issues, they must think carefully about which of the suggested products are high priority and required now and those which they might consider in the future when the client has more disposable income.

What is classified as a short term capital need in terms of the need for life assurance?

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The suitability of the product offered can often depend on the person who is giving the advice. The Financial Conduct Authority (FCA) put rules in place to ensure the product offered to the client is suitable for their needs.

The Adviser

Restricted advisers can recommend products from one single company or across a range of different products and companies.

Independent Financial Advisers (IFAs) can recommend products from the whole of the market. While this undoubtedly gives them wider scope, they often have the onerous task of searching the market and getting several quotes before finding the most suitable for their client. Remember, they are not simply looking for the cheapest product as this might lack certain features or have limitations and/or exemptions that might disadvantage the client. They need to find the most suitable product - even where this may not be one considered as ‘conventional’ - that offers the best value for money.

Anyone who provides financial advice must achieve a qualification equivalent to an NVQ Lev...

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...able guide. Life offices are constantly monitored and ratings are altered accordingly, based on a range of factors (not just the FAR).

Ethical behaviours and consumer outcomes

The FCA’s principles reflect their expectations for those that work in the insurance industry, and the CII’s Code of Ethics provides members  of the profession with a framework to apply to their role in delivering positive consumer outcomes.

Since July 2022, under the FCA’s Consumer Principle, firms need to act to deliver good outcomes for retail clients.  Building on principles 6 & 7, the new principle is underpinned by three rules where firms must:

Act in good faith towards retail customers

Avoid foreseeable harm to retail customers

Enable and support retail customers to pursue their financial objectives

This should lead to good outcomes in products and services, price and value, consumer understanding and customer support.

Name the two types of adviser as defined by the FCA.

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Once all the client’s needs and objectives have been established the adviser should then look at all the possible solutions - including doing nothing - and then recommend the most appropriate solution.

There is no specific requirement for how recommendations should be presented to a client, but they should include the following as a minimum:

The...

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... circumstances should be reviewed on a regular basis to ensure that the financial protection taken out continues to meet with their changing needs and objectives. Ideally, this should be completed on an annual basis.

Reviews should re-assess the client’s needs and objectives and ensure that the existing provisions continue to be suitable.

 

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