For some clients looking for life cover, family income benefit will be the most suitable solution. This policy is the same as conventional life insurance except that the benefit is paid out as a regular income rather than a lump sum.
Some clients may feel a regular income is easier for their families to handle than making a lump sum last for as long as they need. Family income benefit effectively has a decreasing term, so if a policy is set up to pay £1,000 a month over a 25-year term and the life assured dies after 10 months, the policy will continue to pay £1,000 a month for the remaining 24 years and two months of the term. However, if the life assured dies with just six months of the term remaining, the payout will be £1,000 a month only for six months.
In a nutshell, the longer the policyholder lives, the lower the chance of the insurer needing to pay out the full amount of cover. This makes it more affordable than life insurance paid out as a lump sum.
All life insurance policies are subject to limits for the maximum sum assured for people of any given age before medical evidence is automatically requested, regardless of the state of their health. From an adviser’s perspective, avoiding the need for clients to obtain medical evidence is appealing, particularly in the current climate.
Many people are just starting to emerge from the lockdown restrictions imposed by the Government in response to the COVID-19 pandemic and clients will probably prefer to avoid visits to GPs and hospitals if they possibly can. Social distancing may be uppermost in their minds and nobody wants to place more strain on the NHS unless absolutely necessary.
For life insurance that pays out a lump sum, insurers use actuarial tables to work out the point at which medical evidence will be necessary, based on age and sum assured. However, there are no equivalent tables for family income benefit, which makes things a bit more complicated. Insurers use their existing life tables alongside calculations based on the total sum assured – which is, put simply, the annual benefit multiplied by the term of the plan.
The table below shows the different calculations insurers use to determine the sum assured to which non-medical underwriting limits apply.
Most of the insurers in the table use the same or very similar calculations. AEGON, AIG, Royal London and Vitality all multiply the annual benefit by the term of the plan and then multiply the figure again by 0.67. LV= is slightly different in multiplying by 0.66 rather than 0.67 and Scottish Widows uses a different formula which works out virtually the same as the companies mentioned above.
Of the other companies in the table, Guardian has the simplest calculation (annual benefit times term) which produces the highest sum assured before medical evidence will be necessary, while Legal & General has the lowest. However, insurers do not rely solely on this information – they will subject these calculations to their general life sum assured limits when working out non-medical underwriting limits for family income benefit.
The table below shows the general life sum assured limits at which medical evidence becomes necessary for different insurers across three ages – 28, 38 and 48. Some insurers refer to age next birthday while others use age attained, so these ages were selected to make it easier to compare like with like across the market.
Aside from the obvious point that AIG has the highest limit across all ages, one of the most striking things shown in the table is the difference between the highest and lowest sum assured limits at age 28 compared with age 48.
At age 28, the highest limit (Guardian at £1.5m) is more than double the lowest limit (Vitality at £700,000). By age 48, there is less divergence between insurers. The difference between the highest limit (AIG at £600,000) and the lowest limit of £400,000 (Legal & General, LV= and Scottish Widows) has narrowed at £200,000. This could indicate that there is more of a consensus between insurers about the point at which to request medical evidence as the client gets older.
To get a clearer picture of what all this data really means for clients who are wondering if they will need to provide medical evidence for the level of family income benefit they want, we need to apply the calculations insurers use to their general life sum assured limits for non-medical underwriting. We do so in the bar chart below, which is for illustrative purposes only.
From this chart, we can see that AIG’s high life sum assured limits mean annual benefit will be almost £90,000 at age 28, around £67,000 at age 38 and at the £36,000 mark for age 48 over a 25-year term when medical evidence will be required.
At the other end of the spectrum, Guardian will request medical evidence for the lowest level of annual benefit – just under £31,000 at ages 28 and 38, and around the £22,000 mark at age 48.
This may seem surprising given that Guardian’s calculation for non-medical underwriting limits (annual benefit times term) is the most generous. However, this is subject to the general life sum assured limits before medical evidence is requested, which are not the highest in the market and reduce the final figures.
Generally, medical evidence will only be required if the client is older or where the sum assured is regarded by the insurer as high. To put this into context, the average sum assured for family income benefit was £17,068 in 2018 and £24,880 in 2019.
Clients taking out family income benefit at this sort of level would not really be affected by insurers’ requests for medical evidence. However, it is important that advisers understand the process and the thinking behind it just in case they have clients who don’t fit the average requirements.