Mortgage advisers regularly help clients navigate major life changes. While much of the focus is naturally on borrowing, refinancing and insurance, there is another conversation that may become increasingly relevant in the years ahead: What happens when a client no longer needs a life insurance policy they once considered essential?
Should the option to realise some value from that policy be explored? Or, considering the secondary market for life policies is relatively new, to the UK at least, is it best to steer clear?
SITUATIONS CHANGE. SUCH IS LIFE
Every year, hundreds of thousands of life insurance policies are allowed to lapse often because a new policy has been taken out instead, or when a customer’s circumstances have changed. Children may have become financially independent, a mortgage may have been repaid, assets may have increased, or a client may simply feel the original need for protection no longer exists.
Traditionally, the outcome has been straightforward: the policy is cancelled and the customer walks away with nothing.
A developing proposition within the UK market is challenging that long-established outcome by offering customers the opportunity to sell certain unwanted policies rather than letting them lapse.
While this approach remains relatively unfamiliar to many advisers and insurers, secondary markets for life policies have operated successfully in other countries for many years and the assignment of life policies has a long-established legal basis in the UK.
INNOVATION: INSPECT OR IGNORE?
So far so good. But the secondary market for life insurance policies is not without its critics. Some in the industry have understandably raised questions, suggesting that wider adoption of this type of proposition necessitates appropriate evidence of consumer protection and vulnerability safeguards.
These concerns deserve to be taken seriously. Any reputable provider operating in this space should have robust safeguards, suitability assessments and vulnerability procedures in place. Propositions should be characterised by rigorous due diligence and processes designed to ensure that customers fully understand the implications of selling a policy.
It’s worth noting that providers in this market stress they are not seeking to persuade customers to cancel life insurance. Instead, they focus exclusively on people who have already decided to lapse or switch a policy. In those circumstances, the proposition is positioned as an alternative to receiving nothing from a policy that is about to be abandoned.
SO, A QUESTION OF INFORMED CHOICE?
For mortgage advisers, the key consideration is not whether every client should pursue this option. Clearly, many should not. If a client still requires protection, or if their circumstances suggest they may need cover in the future, maintaining appropriate insurance may remain the best course of action; especially if they have health concerns that could mean they may not be able to obtain cover in the future.
Equally, some clients may be better served by reviewing their protection needs with a specialist protection adviser or independent financial adviser before making any decisions.
However, when a client has already decided that a policy is no longer required and intends to lapse or replace it, it makes sense to make them aware of all legitimate options available.
As awareness grows, mortgage advisers do not necessarily need to become specialists in this area. But understanding that a secondary market exists, understanding what good looks like when it comes to providers in that market, and recognising when a client may benefit from exploring it alongside independent advice, could help broaden the range of options available to consumers.
Ultimately, good advice is about helping clients make informed choices. For customers who genuinely no longer need their protection policy, the most important question may be a simple one: before you walk away with nothing, have you explored all the available options?
