As the COVID-19 pandemic has highlighted protecting a clients income is a vital part of any advice process. Whereas income protection will replace lost income due to a clients’ inability to work through ill health, Family income Benefit will replace a family’s lost income due to death. Both are hugely valuable contracts and should be the cornerstone of most protection advice, however as income and expenditure changes they also need to adapt to the clients’ circumstances. In this article we look at how the sum assured within family income benefit plans can be increased without the need for underwriting.
The sum assured within a family income benefit plan will be closely aligned to the income and expenditure of the life assured. The ultimate aim is that if the worst happens the family of the life assured will be provided with enough income to support them until a set date (often retirement). As such any significant change in either income or expenditure should result in a review of the benefit with changes being made to ensure that suitable cover is in place.
Throughout a clients’ life there will be certain events that are likely to lead to a significant increase in either their expenditure or income. Whether this taking out a mortgage, marriage or even having a child it is good to know that the client will be able to increase their cover.
Guaranteed insurability options allow clients to do just this without the need for medical underwriting. This is particularly beneficial if a clients’ health has deteriorated since they took out the plan as it will enable advisers to provide more cover for the client (as long as a certain event has taken place) without the need to provide medical evidence and therefore any potential extra rating.
Across the market there are many different events in which guaranteed insurability options can be used and different insurers stipulate different events. The table below highlights in what event each insurer allow within their family income benefit offering:
From an advisers perspective, they would love to think that a client will come to them pretty quickly after such an event occurs, however in the real world this will rarely happen. As such these are more likely to be picked up on client reviews or casual conversations with clients some time after the event has happened. This can therefore cause problems if an adviser wants to use a guaranteed insurability option as insurers apply a maximum time frame after the event in which they can be exercised. Clearly the longer an insurer allows from the time of the event the better and below we highlight how long each insurer stipulates.
In terms of the amount the sum assured can be increased by, all insurers will place maximum limits. In cases where the starting sum assured is relatively low or the increase required is not substantial, these limits are unlikely to be a factor. Where the starting sum assured is high or the increase is substantial compared to the initial sum assured they might be.
Insurers will generally set the limits at a percentage of the original sum assured when the plan was originally taken out to a maximum monetary amount. In the case of family income benefit this will either be based on the monthly or annual benefit. All insurers will allow guaranteed insurability options to be used multiple times throughout the contract and some will set out different maximum limits for each event and the total of all increases throughout the term of the plan. The charts below highlight what these limits are based on an annual benefit.
**For Scottish Widows the maximum benefit increase is £150,000 divided by the number of months remaining on the policy
**For Scottish Widows and Vitality the maximum benefit increase is £150,000 divided by the number of months remaining on the policy
Although many of the events listed are more likely to happen at younger ages, some may still happen at older ages. With the exception of Guardian (who do not stipulate a maximum age), all insurers require the client (or the eldest client in joint life cases) to be 54 or younger in order to exercise a guaranteed insurability option.
Unfortunately guaranteed insurability options will not be offered to all clients. Currently AIG, Guardian, Legal & General and LV= are the only insurers that will offer such options to clients that have had a rating applied to their policy. They will not however offer it to all rated cases and the below highlights the maximum rating that each insurer will offer guaranteed insurability options to:
- AIG – +100% rating or £2 per mille
- Guardian – +100% rating
- Legal & General – +100% rating or £2 per mille
- LV= – +200% rating
Family income benefit plans are a cost effective way of protecting a families income in the event of death. When used as part of a menu of benefits they can compliment income protection and mortgage protection perfectly to enable a rounded solution to provide better financial resilience for different circumstances. As an income based plan it is vital that it is reviewed regularly to ensure that it keeps track with the client(s) income and expenditure. Although they will not always be suitable, if a client has had a significant life change they can be a fantastic way of increasing their cover.
Where the sum assured or increase in sum assured are not particularly high, Guardian offer a very strong proposition as they offer the longest time between the event happening and when the policy can be increased along with no limit on the age at which the option can be exercised. Legal & General should also be commended for offering the highest percentage increase and highest monetary increase on a single event respectively with LV= having particularly high limits across multiple uses of GIOs.