Financial protection

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To provide advice that it suitable and results in a good outcome for the client it is essential to fully assess the client’s personal and financial circumstances, ensuring that all relevant factors are identified.

Age

Clients’ protection needs develop as they get older:

Younger clients are likely to have a dependent spouse/civil partner and children. They are also likely to have a higher level of debt, such as a mortgage

Most working age clients should consider the need for protection against the financial implications of illness / disability that would prevent them from working

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). They may still have a need to protect a spouse / civil partner, if pension income were to reduce or cease on death

An additional consideration is that, in general terms, the premiums on protection products increase with age.

Marital Status

The client’s marital status is an indicator that there may be a need to provide protection for their spouse / civil partner. Even an unmarried may wish to protect the living standards on a long term partner. Being married / in a civil partnership or a more informal arrangement does not necessarily determine financial dependency, some spouses / civil partners may be wholly financially independent of each other.

Consideration should also be given to any planned changes to their status.

Divorce/dissolution

The prospect of divorce or dissolution of a civil partnership may suggest a need for planning.

Marriage / entry to a civil partnership invalidates a well, unless the will was written to reflect the marriage / civil partnership. Divorce / dissolution does not invalidate a will but effectively disinherits the former spouse / civil partner

There may be an arrangement whereby one of the parties pays maintenance to the other, if this would cease on death of the individual who is making the payments there is likely to be a protection need

Existing policies may need to be re-arranged, particularly joint life / life of another policies and policies held in trust

If divorce/dissolution has already happened then the above arrangements may need to be reviewed to ensure that required chan...

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If there are liabilities that the client’s spouse/civil partner would be required to continue payments on in the event of the client dying/being unable to work then the preferences of the client and their spouse/civil partner should be ascertained; are they happy with that situation? Is it realistic? Do they wish to put provision in place?

If the client runs a business there may be other liabilities in relation to it.

State benefits

Consideration should be given to the client’s eligibility for State benefits; some benefits are means-tested and other depend on an individual’s National Insurance contribution record.

Whilst State benefits aim only to maintain a basic standard living, if the client is eligible there is no point in duplicating provision through individual arrangements.

It also important to be aware that the Government has a long-term objective of cutting the cost of State provision, to reduce the current annual expenditure.

Existing policies

Most clients will have at least some personal provision in place, whether through individually held plans or employer provided arrangements.

If the client is uncertain as to the details of their current arrangements then the adviser should confirm them

Current plans should be tested against current needs and objectives to consider their continued suitability

The adequacy of sums assured and benefits provided should be considered

Consideration should be given as to whether policies are structured in the optimal way, for example, should life assurance policies be placed in trust

It that some policies are no longer suitable, for example decreasing term cover arranged to protect a repayment mortgage that has been redeemed or employer provided cover duplicating individually held policies

It may be possible to arrange existing cover at a lower cost due to falling premium rates; an adviser must be cautious when recommending replacement, ensuring that any new policy a similar range of cover and that the current policy is not cancelled until the new one is in place

Why is it important to establish the type and source of all of a client’s income?

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It is also important to distinguish between the different areas of need and requirements in the event of the client’s:

Death

Illness or disability

Unemployment

Quantifying life cover

Recommendations should be based on need. Once an initial need for protection in the event of death has been established, that there would be financial implications that the client wishes to mitigate, the following process can help to quantify the amount of cover required:

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 liabilities becoming payable on death, such as in respect of income tax and CGT, and IHT arising on death

Any specific bequests made in the client’s will to those 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

Specific capital need may arise; to replace an employer provided company car or to provide capital into a business following death of the owner

Long-term income needs

Long term income needs represent the cost of providing for the client’s surviving spouse/civil partner or partner and any long- term dependants (excluding children), the costs of which are likely to last for their lifetime.

Examine the current pattern of the family’s expenditure

Deduct any expenses that would cease on death (e.g. mortgage payments in respect of a mortgage repaid by life assurance)

Deduct the costs associated with any children

Alternatively, calculate the minimum expenditure needed

An alternative approach is to establish what the minimum level of expenditure would be in the event of the client’s death. This will generally result in a lower figure but it can be more difficult to arrive at an amount

Having established a baseline

Account for additional costs arising as result of death, for example, in respect of care provision or housekeeping or to replace benefits that were previously provided by an employer, such as PMI

Deduct any income that would continue to be paid such as the earned income of a spouse / civil partner, income from pensions already in payment, investment, or trust income, etc

Deduct any income that would become payable as a result of death, such as any widow/ers pension or benefits from existing life assurance policies

Long-term and short-term needs should be dealt with separately, as different term...

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Clients attach value to the additional facilities provided by private hospitals

A client who travels overseas on a regular basis may require cover for times when they work abroad

A number of issues should be considered in respect of any need for PMI:

A client may be able to access employer provided PMI, sometimes at no cost

A client may wish to make personal provision, on an additional basis or by adding cover for their spouse/civil partner and children

Schemes vary in terms of limits on cover, treatments covered and quality of hospital accommodation

Premiums vary, savings can be made by reducing the level / quality of cover

Health cash plans offer a lower cost but less comprehensive alternative

Redundancy and unemployment

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

Clients should be advised to maintain an adequate emergency fund available, to provide some security in the event that they lose their job, at least for a limited period. The most important financial planning exercise in these circumstances would be to reduce costs.

State benefits provide only a modest level of benefits and it is likely that most people would face a significant reduction in living standards if forced to rely on them.

Limited support for mortgage costs may be available if an individual is eligible for a Support for Mortgage Interest Loan; such payments:

Only commence after an initial waiting period

Are limited to interest on the first £200,000 of a mortgage

Are calculated with reference to a standard mortgage rate, which may be less than the rate the borrower is paying

Are in the form of a loan, which must be repaid

Possible planning strategies include:

Building up a cash reserve, in excess of the required emergency fund, which could be drawn on

Redundancy / unemployment insurance

Use of a flexible mortgage which allows payments to be reduced or suspended for a certain period

Being prepared to reduce outgoings

Redundancy insurance provides the client with reassurance but cover is relatively expensive and, in the event of a claim, typically only pays for a limited period.

Prioritising and affordability

Affordability is a key factor in confirming the suitability of any recommendation. There is little point in making a recommendation if the client cannot afford to buy the product (or maintain 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 meet high priority needs and are required now and  which could be deferred into 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 Adviser

There are two broad types of financial adviser.

Restricted advisers can recommend the products of either a single company or those from a range of different providers. If a firm provides restricted advice, it must disclose the nature of this restriction to its customers.

Independent Financial Advisers (IFAs) can recommend products from the whole of the market, considering all products that may be suitable for a customer. 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 be considered as ‘unconventional.’

Anyone who provides investment advice must achieve a qualification at  the academic level of NVQ Level 4 and maintain a ‘statement of professional standing’ (SPS) with an approved body; the SPS confirms completion of continuing professional development and adherence to defined ethical standards.

Although firms are unable to be paid commission in respect of the sale of most investment products, this does not apply to pure protection contracts. Firms can receive commission in respect of sales of protection products and there is no requirement for advisers to hold a level 4 qualification if they operate solely in the protection market.

Factors that are relevant when selecting a suitable product, and com...

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The CII’s Code of Ethics provides members of the profession with a framework to apply to their role in delivering positive consumer outcomes.

Consumer Duty and the Consumer Principle

The FCA identified that firms in retail financial markets do not consistently and sufficiently prioritise good customer outcomes, causing harm and eroding trust. The Consumer Duty was introduced on 31 July 2022 and a central element was the addition of a new Principle to the Principles for Businesses; Principle 12, the Consumer Principles requires firms to act to deliver good outcomes for retail clients.

The Consumer Principle effectively builds upon these two existing Principles for Businesses:

Principle 6 (‘A firm must pay due regard to the interests of its customers and treat them fairly’)

Principle 7 (‘A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is fair and not misleading’) for retail clients

In situations where Principle 12 applies, such as interactions with retail clients, Principles 6 and 7 do not, as Principle 12 sets a higher standard.

The Consumer Principle is underpinned by three cross-cutting rules whereby firms must:

Act in good faith towards retail customers

Avoid foreseeable harm to retail customers

And enable and support retail customers to pursue their financial objective

The FCA expects to see good outcomes in four areas:

Products and services

Price and value

Consumer understanding

Consumer support

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

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

The client’s current circumstances

The client’s needs and objectives

Quantified needs

Descriptions of...

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Whether all current contracts continue to be required / relevant?

Could existing cover be replaced at a lower cost?

Whether new needs have arisen and, if so, are additional arrangements required?

Does the client’s budget now enable arrangements that were previously too expensive to be put in place?

Are new products now available that may be relevant to the client?

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