Life. It's worth covering...

Posted on 5 January 2012 by Drew

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It’s that moment when you’ve secured what you wanted, but then the adviser/salesperson begins their scripted spiel on the virtues of their insurance, and why you should have it. As usual we listen politely, before declining. They’ll try again, this time with a little more probing (or begging) and again we’ll say no. After one last parting shot, we’re still not convinced and walk away.

The reason this scene is played out so often is partly that what’s on offer just isn’t any good – extended warranties that cost more than the product, mobile phone insurance that doesn’t cover you dropping your phone in your pint(or anywhere else), or loan payment protection insurance (PPI) that seems to be arranged in such a way that it can never be claimed on, no matter what your circumstances, - and partly because we don’t like talking about what how we’ll cope if things go wrong. That happens to other people, not us.

Is it any wonder, then, that we are so turned off by insurance? It doesn’t help that we’re still in the middle of yet another mis-selling scandal this time involving PPI, which has highlighted the calculating and greedy nature of many well known banks and insurance companies. PPI was an unloved product, that was pushed hard on every loan and credit application until very recently. Designed to cover your payments if you were unable to meet them as a result accident, illness or unemployment, these policies had a reputation of being expensive, hard to cancel and rarely paying out. Often they were single premium policies sold along side a personal loan, which meant the entire premium was added to the loan amount and then interest applied to that premium. This seriously inflated the total cost of the borrowing.

Back before I saw the light and joined John Charcol, I worked for a major high street bank and we were heavily targeted to sell this "cover" at all times. The value to the branch for a loan with insurance was almost double that of one without. In my view this wasn’t providing advice, it was more a combination of scare tactics, hard selling and downright lying, which left customers at best with a false sense of security, and at worst a useless policy that wouldn’t cover their loan payments when they needed it most.

Unfortunately scandals and practices like those above, have tended to tar all insurance products with the same brush, and this is so not the case. In fact there are some excellent policies that, when correctly recommended, can quite literally be a life saver. Not only have policies improved but so has the advice. The recession, subsequent property crash and stronger action by the FSA have removed the vast majority of dubious brokers – the ones who specialised in subprime and PPI mis-selling. The number of complaints and payments forced by the Financial Services Compensation Scheme has focused many brokers’ minds about the risk of poor mortgage and insurance advice. If a broker provided the wrong insurance advice to you, potentially the payout you could receive could be up to 90% of the loss you have suffered; therefore if you were paralysed and unable to work again, and it was judged to be that your potential earnings could have been £1,000,000, then the payout could be as much as £900,000 if the product they had recommended had been inappropiate.

(Also, a little known fact is that any commission received can be clawed back if the policy is cancelled within a certain time, typically 4 years. Logically this means that there is no incentive for any broker to try and force their client into taking a product which they will later cancel.) Simply put – providing the wrong advice and wrong product is not an option for any good quality broker.

So next time you are reviewing your mortgage or buying a new house and your mortgage consultant starts to talk about insurance you really should listen to them. They are not trying to flog you a useless product to get more commission, or to hit a target – they genuinely are trying to do their best to protect you and your family. When a broker arranges a mortgage for a client you get to know them pretty well, and personally I always want to make sure that they have everything they need not just to buy the property, but to protect it as well. Although clearly there is a balancing act needed to make sure that the client can afford the cover, or to look at alternatives if they can’t.

So when a broker or adviser talks about protection, please listen and explore the benefits, before saying ‘no’– it really is about ensuring we do the right thing.

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