Julian Knight: Why we have to ring the changes in life insurance
And, while we're about it, let's get rid of commission-based selling, too
Sunday 28 June 2009
As regular as clockwork, whenever I call my mortgage provider they try to sell me life insurance.
I turn it down on the basis that I'm unmarried with no children. But few people are that rootless, and life insurance for many is a financial must-have. Yet only a minority actually have it, despite the fact that it's cheap and can be tax efficient. How to get more people to buy life insurance then?
Trevor Matthews, the chief executive of Friends Provident, has an idea and that is to allow employers to provide access to life cover through the framework of the personal accounts system, due to be launched in a little over two years' time. Mr Matthews has an agenda, of course. Friends Provident is one of the country's biggest providers of ... guess what? Life cover. In addition, it will be in the forefront of those firms managing the new personal accounts. No doubt he can hear the tills ringing – but it's a good idea.
Life cover is usually bought as an add-on to a mortgage or done through a financial adviser who may receive commission (more of this below); neither is always satisfactory. If an employer can offer voluntary access to life cover with premiums deducted from staff pay packets, we will see a surge in the numbers taking out this insurance. Also, big employers should be able to negotiate a cheaper deal.
I'd go further and let people pay premiums from their pre-tax salary – in effect, giving tax relief on contributions. Why? Well, those likely to be covered by personal accounts will be on low to moderate incomes. Providing an incentive to them to insure for their families should they die will ultimately help prevent recall to the state.
Don't forget adviser fees
In life, whoever pays the piper calls the tune. I have seen one mis-selling scandal after another, all with the common denominator that those who advised the public to buy the products earned a whopping commission. Some of the worst examples followed the sale of so called precipice bonds around the turn of the century. Put simply, advisers incentivised by commission sold the bonds to people looking for extra income in retirement without making it clear that they were high-risk investments. The inevitable happened, the market moved against the investments and thousands had their life savings wiped out. Unless we get rid of commissions, history will repeat itself – I already have my fears about some so-called "structured products" flogged by advisers at the moment.
The Financial Services Authority, in its catchily titled Retail Distribution Review agrees, and wants an end to commission by 2012. The big idea is people knowing precisely how much advice will cost them and being given the option of paying upfront or having it deducted from their investments. This is a decision long, long overdue. The difficulty is that many consumers don't want to pay for financial advice, hence we will end up in a situation where financial advice may only be for the rich. As well as getting rid of commission, we need to review the level of fees charged. In this country, financial advice is priced as a premium product and hence is inaccessible to many who need it the most.
A friend of mine was recently offered access to a financial advice firm by her employer. The firm wanted £200 per hour for the services of a financial adviser who had only the most basic qualification. That is a rip-off. We are not talking barrister time here.
We need what Otto Thoresen, the chief executive at Aegon, suggested last year – a nationwide financial advice network paid for by a levy on the financial services industry. Anyone would be able to get independent advice on significant life events such as buying a house, having a baby, divorce or retirement. Most advice doesn't have to be that in-depth, and the existence of such a service may well lead to some advisers reviewing their fees or specialising in particular areas, such as tax.
Let's hope that the end of commission is in sight and let's focus on how we get independent advice out to more people at a price they can afford.
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