Most people understand that a life and critical illness policy taken out in conjunction with a mortgage aims to repay the loan if they die or get a critical illness.
The actual – and much more compelling – reason for taking out the cover though, is to ensure a family can actually stay in their own home in the face of future financial hardship.
Life cover is useful for clearing debts like a mortgage. But if debts are cleared, the ongoing expenses of daily life still have to be met.
Our research shows that just a third of people in the UK have insurance in place to provide a replacement income for the family that is left behind . Without a regular income, many people would not be able to continue to support their families, even if the mortgage is paid off.
Solutions
Bearing this in mind, one solution is to recommend a lump sum life cover to repay a mortgage, plus to also advise on an additional amount of ‘family income benefit’ – life cover paid as an income over the remaining policy term. In this way, you are combining protection for debt repayment and income replacement together.
Similarly critical illness cover is good at clearing debts when it pays out its lump sum. But some companies also allow it to be set up to pay a family income benefit too.
Mortgage payment protection insurance (MPPI) can also provide a temporary solution. Most MPPI will replace income for one year, or possibly two. But clients must understand the consequences of this. If cover finishes before they are well and able to work, then they may find themselves in as much financial trouble at that point as they would have been had they not taken any cover at all.
Making clients aware of the limitations of products and their options is obviously important from a ‘Treating Customers Fairly’ (TCF) point of view. So another consideration is income protection, which pays for a much longer period of time than MPPI if the person remains ill.
Fortunately, menu products – sometimes referred to as multi-benefit products – allow you to present a range of options to your clients. Fortunately the form filling required for these covers, which can include life, critical illness, income protection and unemployment cover, is usually no more onerous than for a single benefit product.
The menu
The menu product structure is ideally suited to TCF because you can present the ideal solution to your client – perhaps a combination of life and critical illness cover to repay the mortgage, plus a little extra to cover other debts and some family income benefit to replace the family’s income if the breadwinner dies.
Plus some income protection to cover long-term sickness absence from work. There on one page the client can see a range of cover that meets their needs exactly. They can see what cover they might need to be able to stay in their own home and protect their lifestyle too.
The premium for all this cover might be more than a client, especially a first-time buyer, is prepared to spend. However, by using the menu product to set out the preferred solution you create a benchmark from which you and the client can then tailor their plan to their exact budget. This might mean reducing some of the cover, but the option will always be there to increase it in the future.
Using the menu also allows you to extract the maximum amount of value for your clients from your recommendations. Remember that two single life covers are often only a few pennies more a month than a joint life cover and this could potentially mean twice the payout.
While starting with £100,000 of life cover and jumping up to the same amount of life and critical illness cover might treble the premium, the menu plan would allow you to settle on, for example, £75,000 of life cover only and £25,000 of life or critical illness cover – effectively giving the original £100,000 of life cover in total, but a more affordable level of critical illness cover.
The menu plan helps cut back on the form filling, by combining all the covers on one application, and it allows advisers to create the correct benchmark of protection for each customer, then tailor the solution from that starting point. This has to be a good thing.
Wider customer needs
When considering protection as part of a mortgage sale it is often easier just to focus on repaying that loan, or options like MPPI and life cover may seem like a simpler approach. But chances are this isn’t all that clients need.
To treat customers fairly we need to take into account their wider needs. Life cover might be the obvious choice, but in many instances a factfind will establish that a client is very much underinsured. They need to be advised that it’s not just their mortgage they need to cover, but their wider family finances as well.
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