Since the coronavirus outbreak, the industry has been increasingly concerned that clients suffering from financial difficulty may cancel their valuable life policies at a time when they may need them most. Insurers are constantly being asked whether they will provide premium holidays to such clients and some insurers have made positive moves by starting to offer such capabilities. This will undoubtedly help many clients keep their policies in force, however the drawback with this is that the client loses cover during the premium holiday. Yesterday, Vitality were the first insurer to offer clients the ability to reduce benefits (and therefore premiums) without requiring underwriting to reinstate lost benefits. In this article we get into the detail of what this entails.

The ability to reduce benefits is not something that is new. Most if not all insurers allow clients to do so without the need for underwriting. . Whilst this is clearly a better option than cancelling a policy altogether, some cover is better than no cover at all, up until now, no insurer allowed the client to reinstate their benefits to the previous level without underwriting.

As the current extent of social distancing  is hoped to be  relatively short lived, many clients will be able to return to work once enforced isolation is lifted. If at such a time the client has a policy with reduced benefits, they may be underinsured. Traditionally reinstating cover might lead to fresh underwriting. If that client also has health conditions, they may end up paying a premium far higher than what they paid previously.

Vitality’s announcement yesterday alleviates this problem by allowing clients to reduce benefits by 25%, 50% or 75% for a three-month period. After that  period,  importantly, the cover will automatically be increased back to the full benefit amount without any need for underwriting. During this period Vitality’s partner rewards will be unaffected.

Where a client does make a claim during the benefit reduction period, the amount paid would depend on the severity level of the clients’ condition. There for if a client reduced benefits to 50% of the original benefit and claimed for a condition that paid 25% they would receive 25% of the 50% benefit. When the benefit returns to the full amount after three months however the overall benefit will only be reduced by the amount that had been paid. Therefore if someone had a sum assured of £100,000 and reduced this by 50% to £50,000 and claimed for a 25% condition during the benefit reduction period, they would be paid £12,500. After their three months elapses their benefit would return to £87,500 (i.e. reduced by the amount the client has claimed for) as a posed to £75,000 (i.e. reduced by the percentage of the benefit paid).

Where clients have multiple policies within a plan account such as life cover, serious illness cover and income protection, the reduction in benefits will be applied to all benefits equally. Unfortunately, this means that clients will not be able to reduce their serious illness cover and not life cover or any other variation. This may be particularly important to consider if a mortgage is being covered. The option, however is available to all policies including future applications albeit Vitality will rightly want to satisfy themselves that the client is experiencing financial difficulty. As such the client must be the one to instruct Vitality to reduce benefits, however their adviser will be informed that this has happened and it will have no impact on their commission.

Once a benefit reduction has been instructed the client will have a 7 day cooling off period to reverse this after which the benefits cannot be increased until the thee month period elapses. A client will be able to keep their benefits at the reduced level after three months, however if they do this they will not be able to increase without underwriting. This again, is understandable as Vitality do not want clients taking advantage of lower premiums and then increasing them if they feel they might be able to make a claim.

Let’s be clear, if a client has absolutely no capacity to pay any level of premium then a premium holiday (if available) is the best option. For those that can afford to pay a reduced premium, this is by far a better option as they can still claim (albeit for a lesser amount) during the three month period.

All insurers are working hard to help customers through this turbulent time and perhaps one small ray of light is that the pandemic has led to some genuine innovation. Vitality have clearly put a lot of work and thought into finding a way to help clients financially affected by coronavirus and should be applauded for the speed at which they have managed to bring this to market.

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