A question I’m often asked is do I need financial protection? frankly this is rarely the question… most people are really asking if insurance is worthwhile. Given the scandal of PPI, and a general mistrust of financial services, it is little wonder. Add in the reality that there is a general assumption that such contracts are designed to favour the insurer and the lawyer involved, many question whether the insurers would ever pay out.
OK, there is little I am going to be able to say to convince anyone that is suspicious about “the system”. All I can do is point you to data about claims paid and also relate my own experience. In all the years I have been advising clients, I have unfortunately had a number of claims. All of them were accepted, only one was not paid out at the full amount (they paid 73% citing non-disclosure of material health matters). We are currently considering whether to contest this or not, I can see both sides of the argument – but obviously represent my client, so will represent his interests.
In essence there are really only three types of financial protection I deal with for individuals. So let’s cover what these are.
1. Life assurance – you die, it pays out. Price is everything, there is pretty much nothing between providers on terms and conditions, however there are a myriad of types of life assurance policy and enormous differences in cost.
2. Critical Illness Cover – this is much more contentious. Terms and conditions are everything, quality is upmost, price is secondary – you pay for what you get. However cost still varies enormously. This cover pays out if you are diagnosed with a serious medical condition – it pays you. The main conditions are cancer, heart attack and stroke….all stuff that most of us would prefer not to think about, but probably know several people (depending on your age) that have experienced this.
3. Income Protection – this pays your income if you cannot work due to incapacity and an inability to return to work. Generally cover would pay until you are better and can return to work, or until the policy maturity date (invariably your retirement date). It isn’t so contentious, these days a lot of employers provide cover. Certainly terms are important – most basic being does it pay out if you cannot do your job or any job or any job for which you are suitably skilled/able. Cover is always less than your total income, as this provides an incentive for the claimant to “make a recovery” and also reduces fraud. Cost varies considerably. Generally cover is a percentage of income, up to a maximum and starts typically after 3, 6 or 12 months of “being unwell”… the longer this “deferred” period, the cheaper the cover. This isn’t accurate… but gives you an idea.
Which job would you prefer?
Job A: £60,000 per annum
Job B: £59,500 per annum plus £38,675 per annum until 65 if you have a long term illness.
As I say, its not accurate, lots of if’s but’s and maybe’s…. but hopefully I am conveying the concept.
So how much cover do you need?
That depends entirely on your circumstances, the cost of your lifestyle, your age and your level of debt and if you have anyone that is relying on you. It is generally true that the more you need cover, the less you can afford it… think of a young family who have a tight budget…precisely because they have a tight budget they need cover. Some people don’t need any cover (because they have ample resources). In essence they are self-insuring, however some of these people would prefer to pay for insurance so that they pass the risk to the insurer rather than bear it themselves, so using funds for other, more enjoyable purposes.
So you have a load of old policies. You have some cover. Sometimes it isn’t a good idea to change the cover – the policies where terms and conditions matter generally are weaker and more vague these days than they once were. However some can be reviewed. Don’t forget on the whole your debt should be reducing and you and your family, if you have one are older, less dependent.
Financial Times (FT) Financial Adviser Awards 2015
Yesterday I attended the FT Financial Adviser Awards – having been nominated for “Protection Adviser of the Year”. I’m pleased to say that it was a podium finish (2nd)… which isn’t bad (the winner is a thoroughly good adviser that I respect – genuine congratulations). Of course I would have preferred to win – but hey, out of 24,000 advisers in the UK… I, like Nico Rosberg need to keep improving. However I don’t really know the exact reason why I came second (unlike F1 there isn’t a final lap chequered flag. I assume it cannot be based on the amount of protection business I arranged over the last year (consider the big networks of advisers or Bank employees), so I presume it is the quality of the advice process, perhaps also because I have always removed commission from protection policies (reducing the cost for clients) which is still unusual and not a regulatory requirement of “adviser charging rules”. Perhaps it was the case study, business model or interview that revealed the quality rather than the quantity of our protection advice. At this stage I don’t know, but what I do know is that if you find yourself in a nightmare scenario – the inability to earn, or life threatening illness or worse – suddenly bereaved, having cover in place that removes financial stress makes all the difference in the world. Because sometimes in life stuff happens that we don’t like.
We’re not selling, we offer an opportunity to buy… eh?
I had to laugh, sorry. I was listening to an item on Radio 4 about how temporary workers are being sold insurance that they either don’t need or won’t pay out. Now we’ve all heard this stuff before… PPI springs to mind for starters. I admit that I know nothing about this sort of insurance (accident cover, for temporary workers) but of course I do have a pretty good handle on financial protection. Anyway I was amused to listen to the defence that to the effect that “it is not being sold…. it is being offered” the “offering” techniques seem to be the same as any sales technique, but I hadn’t heard this excuse before. The important issue being that insurance being sold is a regulated activity and therefore needs proper disclosures etc to meet standards set by the regulator.
Admittedly, I am have witnessed the process reported. Indeed I am reliant upon the information provided by the reporter, but frankly, the way it looks… if it walks like a dog, smells like a dog, barks like a dog, looks like a dog…. it probably is a dog. if not, then I think the regulator is in for some testing times ahead… what would stop all advisers simply saying that they are offering pensions, investments etc… and therefore not selling them (arranging may be a more palatable term). I imagine that the regulator would have something to say and demand compliance and payment of their fees. So I assume and hope that the FCA apply similar logic to those merely making such “offerings” or “opportunities to buy”.
Everyone sells, but there are still lots of grubby sales techniques
It seems that many people don’t like the term “selling” yet we all do it. Yes all of us. Selling is merely persuading someone to make a choice. Ethical or good or “proper” selling is therefore persuading people to make choices to their personal or collective advantage. We all do this a lot of the time as Daniel Pink illustrates so well in his book “To Sell Is Human”. Without actual “selling” nothing much would happen and we certainly wouldn’t have a recognisable economy. However clearly there are many that sell (or try to) unethically. I was disappointed to receive an email this week offering to sell me names, addresses and full contact details of people that may have had PPI “second use PPI hot key leads” . In fact it made me cringe (ok perhaps range)… I can buy (anyone can) 100,000 for £6,500. I don’t buy leads, but of course what arrives in my email box (initially) is open season. If you are anything like me, you are fed up with the banks that sold it and the claims companies that keep texting, emailing or phoning. They are an utter nuisance and ought to be banned.
Dominic Thomas: Solomons IFA
Taxing interest in PPI refunds
As you will have gathered, I’m not a fan of Payment Protection Insurance and never have been. However if you come across someone with this and they have had a successful refund with interest, be warned. Leading accountants are suggesting that the interest is liable to taxation and will need to be declared as income as part of your self-assessment returns. Now, given that 31st January is the deadline for tax payment without a penalty this doesn’t leave much time. However, acting honestly with HMRC is frankly the only approach worth taking. Honesty is clearly not a word associated with the Banks and insurers that sold millions of these policies and as we all know, the PPI claims companies are largely just as dishonest, it is hard to work out who really wins in these situations – even good advisers that didn’t sell this (myself included) have all had numerous calls and queries from people double checking and reassuring them that Income Protection is very different from PPI. Here’s a short video from Which? explaining the nuts and bolts.
The PPI Claims Scandal
The storms and floods that have swept Britain seem to mirror the PPI claims scandal. You will remember that predominantly Banks, sold payment protection insurance to anyone with a credit card, loan or mortgage. On the face of it this seemed like quite sensible planning, but in practice, the insurance wasn’t worth having as for the majority of people it would never have paid a claim. Unfortunately the regulator was not responsible for this sort of insurance during most of the mis-selling. The Banks didn’t acknowledge a problem. It took a consumer champion (Martin Lewis) to get the Banks to admit a problem and begin addressing it. The scale is huge, probably far larger than anyone previously thought.
PPI Claims Companies
As a consequence, there has been a plethora of claims companies all offering to assist people with their claims. Indeed, this and my previous blog have been systematically targeted as yet another opportunity to push their services. Whilst I am fairly sure that a few of these companies are probably honest, the majority are nothing short of ambulance chasing opportunists with only their own interests at heart. Taking a lesson from direct marketing, they appear to believe that if you chuck enough muck, some of it will stick. Like most of you, I have had a social media bombardment – website, emails, text and phone calls assuring me that I have thousands of pounds to claim. I don’t. I didn’t have any PPI, neither did I advise any client to take any out. There is deliberate intent to simply encourage complaints in the belief that “nothing ventured, nothing gained”.
Wasted Resources – Jobs For Paper Pushers
Unfortunately, these practices have resulted in the Financial Ombudsman being overwhelmed, needing to recruit more and more staff to simply handle the volumes. Who pays for the FOS? well I do (advisers do). This means you do. This is a case of lose-lose. Very few advisers sold PPI, yet they are stumping up the costs. Today FOS announced that they increased their staff by 25% this year and may have to do the same again next year… paid for by? well you and me. As you may imagine, this has set off another spate of storms in the pink paper trade press today.
The 2011/12 annual review shows that FOS received 1,268,798 initial complaints. However only 264,375 turned into proper cases for complaint (19.4%). Some 201,793 were resolved by adjudicators and 20,540 actually resolved by ombudsmen. PPI complaints rose by 31% which amounted to 60% of all complaints and the highest number of complaints about any financial product or process ever. Over half of all complaints related to just 4 financial institutions, I dare say you could guess all four correctly. The cost to run FOS – well £108 million for the 1700 staff. That’s an average cost per capita of £63,500. My source? the FOS site Annual Review 2011/12.