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Hints and tips to help you have more productive protection conversations.
If your conversations are about wealth management or retirement planning, we have some thoughts about how protection can sit alongside your advice to build volume, value and engagement.
Make protection the first issue you raise – those investment strategies or pension provisions are under threat if your client loses the income that pays into them. Show your clients that underpinning those investments (adventurous or conservative) with protection will help to achieve their financial goals.
Use protection in your inheritance tax planning to help your clients leave their legacy to their families, not the tax man. Think about combining a term assurance or whole of life policy with a gift inter-vivos plan.
Consider putting your clients’ protection policies in trust. Talking to clients’ trustees can also provide you with additional opportunities.
Mike and Alan have been together for over 20 years. They own their own home and will pay off their remaining mortgage in the next 5 years. Alan is semi-retired, consulting on a freelance basis and Mike is working full time. They would like to get married in the future and are working towards both of them retiring by the time they’re 60.
We’ll assume you’ve already put together a protection plan for Mike and Alan to take care of each other. Mike and Alan have been coming to you for advice about their pensions and investments but now Alan’s planning to leave some money to his and Mike’s godchildren. Alan has made some shrewd property investments over the years, so he’s got a substantial sum to gift. He’d like his godchildren to have the money now, so let’s look at how you can help Alan’s beneficiaries with potential inheritance tax liabilities should he die in the next 7 years.
Setting up a menu plan for a ‘gift inter vivos’ could help with the potential tax liability on his Potentially Exempt Transfer (PET). This is a way of matching the inheritance tax liability on any gifts that Alan makes in excess of his available nil rate band that HMRC could consider a Potentially Exempt Transfer, if he were to die in the 7 years after making the gift. Alan might also want to consider a 7 year level term policy because if the PET fails there will be no nil rate band available to his residual estate.
This example shows the potential IHT liability on a gift, after deducting any available nil rate band and reliefs, of £600,000. Setting up a menu plan for a ‘gift inter vivos’ could help with that liability.
It’s possible to use a menu plan to cover the liability, by setting up separate policies with different terms. The initial sum assured should be the potential tax liability on the potentially exempt transfer (PET), so in this scenario it would be £240,000 in the first three years (i.e. 40% of £600,000). The total amount of cover would reduce over the years in line with taper relief. If Alan were to die in the first three years then all five policies totalling £240,000 would be paid. If he were to die in year five then three policies would remain to pay out a total of £144,000 and so on.
|Plan||Year 1||Year 2||Year 3||Year 4||Year 5||Year 6||Year 7|
If you offer holistic financial advice you’re probably talking to your clients about their day to day finances as well as their longer term planning. Protection is likely to be a key part of your advice process, but how can you help your clients plan for the unexpected?
Your clients’ protection needs can be tailored to their life stage, so for couples or families with small children, they could consider a smaller amount, say a year’s salary, of life with critical illness cover on an income basis. That could cover immediate needs, like paying the bills, or covering childcare or travel costs if your client becomes ill.
Suggest your clients take cover on an increasing basis, that way their sum assured will keep pace with inflation.
Use an annual review to keep up to date with what’s happening in your clients’ lives. A menu plan can help you to build a protection plan specifically tailored to your clients’ needs, and gives you the flexibility to change it as your clients’ lives change.
Joanne and Phil have been married for 11 years and have two children together, aged 7 and 10. They’re at fee-paying schools. Phil also has a son from a previous relationship. Joanne works as a graphic designer and Phil is a director for a small manufacturing company.
They’ve been with their financial adviser for years, since they arranged their first mortgage. She’s been talking to them recently about planning for university for the children as well as looking to the future and their retirement approach.
This could be for a smaller amount, 6 months’ salary for example. The lump sum would go up in line with inflation too. The family would have an additional sum to use for paying bills, or any additional expenses that arise from treatment.
This would be an additional policy that covered Joanne until she reached retirement and increases in line with inflation.
This means Phil or Joanne would get a lump sum if one of them got a critical illness or died. There would just be one payout for whichever event happened first (but they could choose a replacement cover option to continue cover for the remaining person). They've taken enough cover to be able to pay off the mortgage if they have to make a claim. The amount will go down each year in line with what they have left to pay on their mortgage. And because they have critical illness cover, they may also get an amount of free children's critical illness cover for each of their two children if anything happened to them.
This means if Phil died, the family would have a monthly income to help pay the bills and allows the children to stay in school.
Joanne 35, Phil 48
£200,000 with 12 years remaining on a repayment basis
£2,300 a month
Other basic outgoings
£900 per month
£200K, 12 years remaining
If your clients are business owners, business protection could help them continue to trade if a key person or shareholder gets a critical illness or dies. The proceeds from the cover could help close the gap in income created by the loss of a key person, pay off any business loans and buy back any shares to keep them in business. If your clients are talking to you about business loans or shareholder agreements, talk to them about business protection too. After all, they’ll readily insure their equipment, their premises and their stock. But what about their key people?
You could have a ready-made source of business protection clients. Check your book of clients to see which of them own or are partners in their own business. You could also find out if your clients are working for SMEs – if they are, you could ask for an introduction to the Managing Director.
Review your clients’ company accounts – they’ll help you identify the opportunities for shareholder protection, key person and loan protection. Working with the accountant is also a good way of growing your network of professional connections.
Once you’ve set up business protection for your clients, revisit it annually to make sure staff turnover, new business figures and loan repayments are taken into consideration and are reflected in their level of protection.
Neel and Priya are business partners running a small gourmet pet food company. Neel is the financial director and Priya is the head of sales. Neel and Priya have both invested their own money in the business. Priya’s married to Ashok and they have a 9 month old daughter.
Priya's been talking to her adviser about personal protection because since becoming a mum she wants to make sure her husband and daughter are financially supported if she becomes ill or dies. She hasn’t considered business protection. Now’s the time to start the conversation about key person cover or shareholder protection.
There are a number of different ways in which you can work out the value of a key person. Two of the most common valuation approaches are:
Multiple of salary 7 to 10 x salary or Contribution to profit 2 x average gross profit (apportioned)
or 5 x average net profit (apportioned).
In this scenario, Priya’s adviser is recommending that the business takes out key person cover on Priya. Without her input, it’s fair to say the business’s profitability would be severely impacted.
Average of the last 2 years’ gross profits: £198,000 with 76%% of profits directly attributable to Priya. The appropriate maximum sum assured would be £300,960.
Average of the last 2 years' gross profits
Priya's shareholding in the business
% of profits directly attributable to Priya
Relevant life cover is a tax efficient way for companies to provide a death in service benefit if they have too few employees to offer a group life scheme. This type of cover doesn’t come under pensions legislation unlike most Group Life schemes. If you have clients who are directors of their own business, who pay for their life cover out of their post-tax income, and have dependants, you could save them up to 49% by using relevant life cover. Relevant life policies must be put in trust to achieve the benefits of tax savings. Trusts are not always the best option so you should seek expert advice.
Check your database for clients who are employees or directors of limited companies, partnerships or sole traders. If they haven’t got life cover already, talk to them about the benefits of relevant life. And if they do have life cover, discuss the potential savings you can offer them with relevant life cover.
Once you’ve sold your client on the benefits of relevant life cover, the next step is to show them how it can sit alongside a traditional benefits package for other key employees.
Use relevant life policies with your high net worth and pensions and investments clients to work alongside their current investments – or if your client base doesn’t look like that, network with professional connections and work alongside them to show the benefits of relevant life cover.
Lou has a small design business, Harlow Designs Ltd, specialising in framed prints for the home and office. She makes £2.00 profit on every frame she sells and she is a higher rate tax payer. Lou is a single mum to 5 year old Archie.
Lou’s £500,000 life cover costs her £500 a year. £500 net for Lou’s cover costs the company £981 – Lou pays the £500 premium through her business from her post-tax earnings. In this scenario, we show how a relevant life policy could help Lou save on her cover.
If Harlow Designs Ltd pays the £500 premium, the cover can be written under a relevant life policy:
|Personal life policy||Relevant life policy|
Employee's national insurance at 2%
Income tax at 40%
Employer's national insurance 13.8%
Net cost to company
Less Corporation tax relief at 19%
|A TOTAL SAVING OF 49% OR £390
(that’s 195 fewer frames that Lou has to sell)
Based on current tax rates for 2019/2020.
Mortgages and protection go hand in hand. The mortgage helps your clients buy their dream home while protection helps them to hang on to it if the worst happens. But it can be hard to put the right emphasis on the need. Whatever your approach, here are some tips and suggestions that might help.
Make protection the cornerstone for the affordability conversation - introduce it early on in the meeting as a way to help your clients get the mortgage they need. Lenders are more confident with clients who have a repayment method in the event of death or critical illness.
Consider a policy on a decreasing basis in line with a repayment mortgage but build a menu plan that can also include a small amount of life with critical illness cover on an income basis to support it.
Use an annual review to make sure the loan still meets your clients' needs. If there has been a change in their life since they took out the mortgage, they may need to increase the loan amount, and with it, their protection.
Ben and Anna are buying their first home together after years of renting. Going through the affordability interview, you know what their plans are for the next five years: a new job for Ben, hopefully children are on the horizon too. Now's the ideal time to talk about the fact that it's not the things we're aware of that cause the biggest problems, it's unexpected life events that bring the emotional and financial pressure.
Ben and Anna want a mortgage but have no protection in place. Their need is protecting their mortgage, bills and debts.
Written on a decreasing basis to cover their £200,000 mortgage for 25 years so that the mortgage is paid in full if either Ben or Anna gets a critical illness or dies. There would just be one payout for whichever event happened first (but they could choose a replacement cover option to continue cover for the remaining person). They've taken enough cover to be able to pay off the mortgage if they have to make a claim. The amount will go down each year in line with what they have left to pay on their mortgage. And if your client's mortgage interest rate changes or they decide to increase or extend their mortgage, there is an opportunity for you to review their protection needs.
Written on a single life increasing basis of £20,000 with a term of 30 years for Ben and 32 years for Anna so that cover ends just before they retire (age 65). The lump sum would go up in line with inflation too. This smaller amount would give them an additional sum to use for paying bills, or any additional expenses that arise from treatment.
Premium Protection for a maximum of 32 years, with individual policies for each cover.
You could also consider Whole of Life Cover to help Ben and Anna manage potential inheritance tax liabilities in later life.
Ben 35, Anna 33
£200,000 over 25 years on a repayment basis
£1,000 a month
£900 a month