We can all make an educated guess about what life has in store for us and work towards certain outcomes, but we never really know how things will pan out – for good or bad – until they happen.
Financial planning helps people prepare for life events and achieve their dreams, but it is just as important to protect what they already have in case life delivers one of its hard knocks. Life cover is perhaps the most recognised type of protection that advisers might recommend to clients, but this has many variants. Most will take out a conventional life insurance policy that pays out a lump sum on death, but for others, family income benefit will be the most suitable policy, particularly when protecting a family with children.
Family income benefit is life cover which pays out as a regular income rather than a lump sum on death. It is cheaper than cover which pays out as a lump sum because the longer the life assured lives, the lower the amount the insurer will need to pay out. For example, if a client took out £12,000 of family income benefit for a 12 year term and died in the first year, the total payout would be £144,000 over the term. At the other extreme, death in the final year of the term would provide a payout of £12,000.
Aside from affordability, advisers may recommend family income benefit for clients who want to leave their loved ones a regular income because that would be more useful to them than receiving a lump sum. However, this structure is not set in stone because most family income benefit plans will allow clients to convert the benefit from regular income to a lump sum at the point of claim.
We all know that as clients go through life their needs change, so at first glance the flexibility to convert the regular income to a lump sum sounds very appealing. The majority of family income benefit plans have a conversion option, with VitalityLife the only exceptions.
However, if we look at why someone might want to do this, it does put the original recommendation for family income benefit under the spotlight. Clients who convert are swapping the proverbial apples for pears right at the last moment, so it is interesting to find out what advisers think of the option to do this.
Plus Protect commercial director Matthew Chapman is a fan of family income benefit. He says it may be taken out by someone who has already protected their mortgage but wants to also provide an income for their partner who earns less, or who will need to reduce their working hours to look after children if the worst came to the worst. It may be used by divorcees to cover maintenance payments if they die or by couples with children to provide guardians with money to bring up their children if they both die in a car crash, for example.
For clients who want life cover to provide money to their children until they are financially independent, drip-feeding them a regular income may be easier for them to manage than giving them a lump sum that might encourage reckless behaviour.
“I know a very wealthy guy whose son inherited some money from his uncle, bought a Lamborghini and drove off a cliff,” says Chapman. In his view, family income benefit is recommended where an adviser has spotted a need for income and he doesn’t see how that would suddenly vanish at the point of claim. Using the conversion option ‘negates the validity of the recommendation’ in his eyes.
“I do not understand why someone would convert family income benefit to a lump sum because if you wanted a regular income in the beginning, you would still need a regular income. I think it brings into question the original recommendation, because if you’ve recommended family income benefit and your client is using it as a lump sum, you’ve screwed up as an adviser. You didn’t protect your client properly or listen to what the client needs,” he says.
Chapman accepts that advisers want clients to be in the best position possible but says that isn’t necessarily giving them lots of money via a lump sum that was not part of their financial plan.
“Our job is to make things as easy for them as we can and ensuring they are not financially disadvantaged. A £150,000 lump sum will not be the best position possible for them if what they need is an income,” he says.
The fact that providers offer the ability to convert family income benefit to a lump sum is useful where mistakes have been made during the advice process and clients do not have other policies that pay a lump sum to cover a mortgage, for example. However, Chapman is still not keen on conversion because clients’ families will then most likely experience a shortfall in income if the policy is used for a different reason than intended.
Bespoke Financial managing director Lee Flanagan does not see much need for family income benefit at all among his client base and even less of a need for the conversion options. Affordability is usually an issue, with clients being reluctant to take out protection plans for different eventualities. The priority is ‘keeping a roof over families’ heads’, so conventional life cover will be used as the lump sum can be used to pay off a mortgage.
“We do a lot of volume – we have 1,000 cases a month – and we’ve got to have the most simplistic approach to advising clients who are on a budget. The budget dictates everything,” he says.
Where family income benefit is the best solution for clients, Flanagan does not understand the need to convert it to a lump sum. He believes that if circumstances have changed, this should be picked up by advisers during regular reviews, not left until the point of claim.