Alan Lakey: Dealing with clients without dependents

Some years back, a claims manager lodged a complaint with the Financial Ombudsman Service (FOS) on behalf of a bank customer. The client, 10 years earlier as a 25-year-old, had purchased an accelerated life and critical-illness plan on the advice of his bank and had now concluded that the life-insurance component wasn’t needed as he remained single with no dependents.

Both adjudicator and the FOS upheld the complaint, agreeing that the life-insurance element wasn’t required. They asked the bank to calculate the sum of the overpayments together with the usual 8% simple interest. The bank countered by explaining that they were single-tied to an insurer that did not offer a standalone critical-illness option.

As a result, we experienced the farcical situation of an upheld complaint where no compensation was due.

Protection advisers have a moral and regulatory obligation to take likely future circumstances into account

Of course, this begs the question of how advisers should deal with clients who currently do not have dependents. It also exposes the matter of survival limits and how these might in themselves create a future complaint.

I frequently hear that compliance departments will not allow ‘future insurance’. Presumably, this is another example of the trepidation that the FOS embeds within compliance officers.

However, protection advisers have a moral and regulatory obligation to take likely future circumstances into account in the same way that a pension adviser does. The Consumer Duty and common sense is about value, of which cost is but a single component.

This includes the reasonable assumption that a single person will end up in a long-term relationship and that a couple will likely start a family. The Office of National Statistics advises that 57.8% of households are comprised of couples, a figure unchanged since 2011.

Let’s imagine a scenario where a single person insists on a standalone critical-illness plan. Some years later, he enters a long-term relationship and decides that he now needs life insurance. Firstly, he finds that the cost is significantly higher due to the intervening years. Secondly, he now suffers from a debilitating condition and is subjected to a 100% premium loading.

Many insurers offer accelerated plans where the additional life insurance costs little more

With hindsight, he now wishes that he had opted for a combined life and critical-illness plan, which costs no more than the standalone version with some insurers. Perhaps a claims manager will advise a complaint that life cover was not included?

Consider also what might have occurred had he died in the intervening period. Would his family have levelled a complaint that no life insurance was included? Also, had he died within the relevant qualifying period, would there be a complaint that the critical-illness benefit should have been paid?

Many insurers offer accelerated plans where the additional life insurance costs little more, and in some cases nothing at all. Some, such as L&G and LV=, do not have a survival period, with the other insurers all using 10 days (bar Vitality, which states 14 days).

It can be seen that the typical 10- or 14-day qualifying period would catch out many policyholders who had suffered a heart attack or a stroke. Many of these insurers used a longer survival period 10 years ago.

This same ‘future insurance’ problem rears its head when looking at children’s cover for a couple who don’t currently have children but intend to start a family in the future. In an ideal world, one of them would call the adviser to announce that they are now trying for a child. However, this rarely happens and enquiring about it appends a patina of creepiness.

The FOS confirmed that they do not have any default opinions and will make judgements based on individual circumstances

What generally occurs is that the matter is forgotten until either pregnancy or birth. All insurers apply an exclusion to any conditions identified prior to birth, such as during the pre-natal checks. Similarly, if the cover doesn’t start until after birth, then the numerous child-specific conditions – including Down’s Syndrome and cerebral palsy – will not apply.

I discussed this with the FOS and they confirmed that they do not have any default opinions on these matters and will make judgements based on the individual circumstances.

This includes the suitability letter and other correspondence wherein they look for proof of an adviser-client discussion regarding options, costs and benefits, and for agreement from the client that the recommended route is sensible, affordable and acceptable.

Compliance departments really need to rethink their stance on these matters – in trying to protect their businesses, they are actually forcing a lower level of protection on the client and failing their Consumer Duty obligations.

Alan Lakey is founder of CI Expert