15 minute read
Protection review
In tough times, it pays to spread your professional wings
Alan Lakey
director, CIExpert
When I talk with networks and affinity groups, I often hear the disconcerting news that mortgage brokers only arrange protection insurance for one in four mortgages.
Many reasons are given – the broker is too busy dealing with enquiries, or the broker lacks confidence when discussing protection, and the old chestnut that the broker lacks sufficient knowledge regarding protection. Let’s be honest: it’s not good enough. Mortgage borrowers deserve better – and don’t forget that there are other canny advisers out there looking to poach clients, which may also involve arranging their next mortgage, remortgage, or product switch.
Brokers cannot afford to risk losing valuable clients, particularly with the economic woes that lie just around the corner.
There are numerous reasons why brokers need to immerse themselves in the world of protection. First, there is an obvious financial impetus. A fully comprehensive mortgage protection plan will almost certainly provide a commission payment higher than the procuration fee from the mortgage. Two income streams from the one mortgage – surely that makes sense? A secondary financial motive is that, like regular mortgage reviews, it is likely that future protection reviews will result in an upgrade to the protection. Critical illness plans are improving all the time, and resources such as CIExpert enable a swift review, allowing an upgrade conversation to take place.
So why wouldn’t a broker assist his/her clients when they have an obvious and immediate protection need? Is it a lack of knowledge, a fear that an incorrect recommendation might bounce back as a complaint? There are two ways to address this. The first and most obvious is to accumulate the relevant knowledge, networks, affinity groups, and insurers, all offering a range of learning materials, whether it be face-to-face meetings, webinars, or podcasts. CIExpert offers copious amounts of information regarding critical illness plans, claims statistics, and the various conditions included.
Those brokers who remain unwilling need to consider a liaison with a protection specialist. This form of signposting has proven itself over the past two years, with firms such as Vita assisting MAB members, and Future Proof doing the same for SJP partners. This offers benefits for both parties, allowing the broker to focus on mortgages and the skilled adviser to assist clients in a more focused way than a busy broker could.
The mortgage world will be in turmoil for the next two years – maybe longer – and those brokers who ignore protection may come to regret their head-in-the-sand approach. The last economic crisis forced many out of business because they did not have other types of business to fall back on.
Now, let’s factor in the incoming consumer duty requirements. Firms should already have a framework showing how their actions meet the new requirements. Would a broker be meeting these rules if he arranged a long-term debt and failed to offer a solution to the potential for premature death, diagnosis of a critical illness, and possibly loss of income due to ill health? One of the key messages relates to consumer support; therefore, ignoring protection needs must be termed a consumer duty failure with potential consequences.
Let’s chuck another concern into the mix. Brokers have a common-law duty to assist their clients, a duty buttressed by the consumer duty obligations. Let’s not get this tested in a courtroom. Imagine the scenario in which a broker has assisted a client in accumulating a £250,000 debt and failed to raise the subject of protecting that debt. Some time later the client dies, and the person’s spouse, assisted by a predatory claims management firm, files a complaint. What will the Financial Ombudsman Service decide if that complaint reaches their desks? They are likely to ask for the file and scan it for evidence that the subject was broached. A lack of evidence might compel the FOS to find in favour of the complainant – and don’t forget, the FOS can award compensation of up to £355,000, a figure that would likely bankrupt many small firms.
So, whether as a defence mechanism or as a means of providing a more rounded service, brokers need to stretch out and better understand how to advise on protection. Failing that, a liaison with a specialist firm would appear to be the answer. M I
Getting commercial-property insurance
Alan Richardson
head of expert advice, LifeSearch
Writing something new about protecting mortgage debt was always going to be challenging, but with the recent announcement that stamp duty on commercial and new-build properties is to be scrapped, I suspect we’re about to see some changes in the market.
I want to focus on the commercial market and the ramifications for protection.
Commercial property returns have for some years seen yields two to three points higher than those on residential B2L property. This is driven in the main by much longer lease agreements than the Assured Shorthold Tenancies (AST) that are the norm in residential letting, which in turn drive the instant increase in value when a vacant property is leased to a good tenant. For some, such extended agreements may be seen as a drawback, but for many, the removal of stamp duty on purchases of these properties will surely, and as intended, stimulate sales. This is even more attractive on commercial property, as the stamp duty was based on the total purchase price, inclusive of VAT.
What, then, does this have to do with life insurance? Let’s talk this through.
LENDING CRITERIA
With the introduction of the consumer duty cross-cutting rules, and the behaviours set out therein, it is reasonable to assume that lenders will see insurance as a tool to fulfil this duty. It has often frustrated me that commercial lending usually requires fire insurance in place, but lenders seem unconcerned about the health of the owner. This may be more of an issue for owner-occupied properties, but statistically, over a 25-year period, a 42-year-old is significantly more likely to encounter financial hardship through health issues than fire. To illustrate this: In 2019, there were 2,300,000 commercial properties registered in the UK. Of these properties, 15,005 suffered a fire that resulted in claim that was met, after excess. This, aggregated up, equates to a 13.9 per cent chance of an owner needing to claim, on average, £62,000.
Over the same period, I, as a nonsmoking 42-year-old, have a 28 per cent chance of not being able to work for two months or more. I have a 15 per cent chance of suffering a serious illness, and a six per cent chance of death. There is a 36 per cent chance of any of these happening. Just looking at these percentages suggests the impact of health risks is likely to be significantly higher than that of fire risk.
COMPANY OWNERSHIP
Any search through an aggregator’s website will produce an indication of costs for insurance. Some might even apply medical or avocation loadings. The unwary client or adviser might then look to progress one of these policies and even get the policy on cover. What most won’t realise until it’s too late is that they have purchased a personal cover. With a little thought, the claim might even pay into trust, with their spouse and children noted as beneficiaries. But this perfectly valid policy won’t provide the outcome that is needed for either party. Nor has the policy been set up in the most taxefficient way.
To achieve this, an adviser qualified to arrange business protection is needed. Only a policy owned by the company can be assigned to a lender. Their insurable interest is the mortgage provided to the company, not the individual, and as such, they will expect to correct ownership. Having the company pay for the policy when arranged in this manner is tax-efficient at both the premium payment and claim stages.
Getting this cover arranged does take a little more understanding and time, but, when done right, will save many thousands of pounds.
INHERITANCE TAX
Most commercial lending is provided on a capital repayment basis. This will result in full ownership of the property, hopefully, by the end of the term. This is important because the criteria for assets to qualify for business property relief (BPR) (an exemption from Inheritance tax) is often misunderstood, and even now evolving. It’s important to understand that BPR is applicable to trading companies. A company that exists as an investment company won’t, in many cases, meet this trading criteria. This means that a huge asset that has risen in value will now be contributing to a client’s estate valuation – and, subsequently, the inheritance tax against that estate. Life Insurance is a great tool to fund any potential tax settlements in these circumstances, and, again, requires expert advice to be arranged correctly.
Writing protection is often perceived as being easy, and sometimes it is. But as with any trade, getting it right to meet the specific needs of the client takes experience. The next time you’re looking at commercial lending, please don’t suggest your client look online – put them in touch with an adviser who will take the time to understand what they require and provide the protection that suits them. M I
Amateur sports enthusiasts shouldn’t ignore risks
Mike Allison
head of protection, Paradigm Mortgage Services
There have been many shocking stories recently about former sporting heroes being diagnosed with all sorts of degenerative diseases as a result of their professional careers.
For instance, just recently we have heard that motor neurone disease (MND) is now deemed to be 15 times more likely in former professional rugby players than in the general population. Leading neurologist Dr Willy Stewart, from Glasgow University, found the risk of any neurodegenerative disease was more than double for former international rugby union players.
Former Scottish internationals were at just over twice the risk of developing dementia and three times the risk of Parkinson’s.
The shock finding comes after rugby legends Doddie Weir, 52, and Rob Burrow, 40, were diagnosed with the devastating condition caused by the death of the nerves that carry messages from the brain to muscles. It affects the ability to move, talk, and breathe. Most people, unfortunately, die within two years of being diagnosed.
Dr Stewart’s previous research resulted in under-12s being banned from heading footballs during training. His latest analysis – comparing 412 former Scottish international male rugby players with 1,200 individuals from the general population – revealed that the chances of them being diagnosed with a neurodegenerative disease were 2.67 times higher.
However, there was an even bigger risk for MND, with rugby players being roughly 15 times more likely to be diagnosed with this disease than those within the same age range – that is, born before 1991 – in the general population.
We know this is an incredibly complex problem and an area in which – like many other diseases – there are constantly calls for research.
While I am mentioning research, a big shout-out should from this column to William Lloyd Hayward for his amazing efforts in supporting the Alzheimer’s Society via the charity ball he organised in September – raising in excess of £50,000. A magnificent effort by him and all the team at Brightstar, as well as the many contributors, of course. It is only through research that these diseases can be fully understood and cures found.
Dr Susan Kohlhaas, director at Alzheimer’s Research UK, has noted that rugby means so much to so many – it is a game that inspires, that brings people together from many cultures around the world. She went on to warn, however, that, “as with all contact sports, it has risks. While the benefits of physical exercise on brain and heart health are well known, multiple studies show links between traumatic brain injury and the development of dementia. It’s concerning to see research now identifies former male rugby players as being at increased risk of dementia and at particularly high risk of motor neuron disease.”
More recently, and bringing it down to a simpler level, I was recently made aware of a case of simple fracture cover that supported a Zurich client, who had taken out a life with critical illness policy with Zurich in September 2018.
The client had a nose fracture in 2019 via a freak accident, and then a further one when working on a ladder four months later. The client commented that he was grateful to have the cover in place, as he needed surgery both times.
While as advisers you hear stories like this continuously, it is good to hear clients speak about the benefits as well as the reassurance that insurers do pay claims – something the industry as a whole is fighting to reinforce.
We can get hooked into the process of linking life-cover amounts with mortgage amounts and debts, but it is vital that in the new consumer duty era we all try to remind clients of the types of insurance that exist out there and don’t just focus on those core products.
From the highest-profile people to an average client, insurance can provide all with support, whether it be fracture cover, the traditional three, or even dementia and frail care support from Vitality, in addition to the hybrids provided by the likes of Met Life.
I have had a number of conversations with insurers over lengthy periods of time now as to how they can support advisers by informing them of ongoing claims, whether it be life, CI, or income protection – or any other, for that matter.
My view is that if people are going through a claim process, then they are potentially vulnerable either financially or through stress. Given the heightened awareness of client vulnerability and its inextricable links to consumer duty, this is one way in which providers can work with advisers to support them in their duty of care to clients, and in some cases get an extension to, or some kind of replacement for, cover once they have had a claim.
Elite sport is not for everyone, but insurance should be – there is always going to be risk involved, and it’s highly important clients have the cover necessary to mitigate against it. M I
Not rocket science
Shaun Almond
MD, HLPartnership
Why are house prices so high and why is property so scarce? The stock answers that get trotted out in almost every debate include everything from greedy second homeowners pricing locals out of their own towns and villages to selfish older homeowners not downsizing to allow a new generation to aspire to larger properties to Uriah Heap-style landlords buying up property and putting those dwellings beyond the reach of ordinary buyers and especially first-time buyers.
All of those are symptoms that have their platform in an emotional context based on a haves-and-have-nots litany to which the mainstream press is happy to draw attention.
However, the number-one reason, and one to which I have subscribed for a long time, is the simplest to understand when looked at through a purely economic lens. It is all about supply and demand. A shortage of supply means that as long as people have the means and desire to buy, prices of available property will increase. It really isn’t rocket science.
Not enough houses are being built to meet demand and, as with all other commodities where demand outstrips supply, the importance of that commodity is expressed in terms of the value put on it by potential buyers.
As we enter the final quarter of the year, with a new king and a new prime minister, it is good to see that housebuilding statistics have turned positive. It was only last month that I quoted from Homes England about the missed housebuilding targets, saying, “Housing programmes delivered by Homes England resulted in 38,436 new houses starting onsite and 37,164 houses completed between 1 April 2021 and 31 March 2022, as the sector began to recover from the COVID-19 pandemic.”
Today the latest data from the government is more encouraging. Figures show that record numbers of housing developments were started during the second quarter of 2022.
Government data on housebuilding starts and completions shows the number of dwellings where building work has started onsite was 51,730 in the three months to the end of June. That is a 21 per cent quarterly rise and a 15 per cent annual increase. It is also the highest level on record, with figures going back to 2002. However, for anyone who has grown tired of inflated projections on the basis of little evidence, we will wait to see whether this welcome news is actually sustainable before we call it a real upward trend.
FACT AND FICTION
I read that c. 30 per cent of mortgage holders are worried that they won’t be able to afford their repayments because of rising rates, which is a shocking statistic. However, I wonder whether the 2,000-people sample was taken only from among those with a variable-rate mortgage, as I am pretty sure that another, older survey claims that over 74 per cent of mortgage holders are on a fixed rate. Not only that, but UK Finance also claims that since 2019, 96 per cent of new mortgages have been raised on a fixed rate, which makes the immediate concern over mortgage Armageddon not so instant, although it makes great clickbait for the tabloids.
But there is an underlying issue: when those fixed rates end, what will the rate for a similarly termed mortgage be? The two- to five-year fixed rates that are the most common ones in service might very well not be long enough to see another low base rate environment arrive in time. As it is, UK Finance estimates around nine per cent of those whose fixed rates are due to end this year, or around 117,000 borrowers, will have less than 10 per cent of their income left over as disposable income after moving to a new deal.
So, whilst a fixed-rate mortgage buys clients time, what should they do now? Should they wait it out or seek another fixed rate with a longer end date, even if they might have to settle for a higher rate, to get the comfort of knowing that that their costs will be fixed for longer?
Only by talking to a human mortgage adviser can customers really get a true analysis of their choices. This is where the value of an experienced broker is far greater than any online provider. M I
