Life - Articles - Life is cheap, so why isn’t government pushing it?

The life protection market in the UK is the perennial wallflower at the financial services ball. Often seen as dull and reliable, it never seems to attract the interest of either advisers or their customers to the extent that it deserves. Rather, they seem to be relentlessly drawn towards the more glamourous, but less steadfast, investment offerings.

 By Tom Murray, Head of Product Strategy, Exaxe

 Even government policy seems to be inexorably focused on getting people to save more to prepare for a rainy day. Government announcements, investigations and policy rumours are almost always concerning pensions and savings, ways to encourage more people to accumulate pots of money which they can use if anything goes wrong. This makes sense in that it suits government if people can provide for themselves rather than rely on the state when things go wrong. However, it would surely make more sense for lower earners to collectively band together to protect themselves from untoward circumstances, rather than try to single-handedly build the monetary defences they need to ensure their future isn’t swept away by a financial catastrophe.

 The reality is that there is a limit to the amount that people on low incomes can save, so inevitably their ability to withstand misfortune based on their savings is very low. As a result, the advent of a critical illness, the sudden death of a main income earner, or an accident to any family member can mean that the household is quickly forced into the position of relying upon the state for support.

 However, for the cost of the savings that the government are encouraging, a level of pooled protection sufficient to cope with the frequency of these disasters is a realistic proposition. Nudging people towards income protection, term-life protection and critical illness cover would be a far better bet for the individual concerned, their families and indeed the taxpayer.

 Similarly, financial advisers tend to run with the glamour of investment products with their fancy illustrations of growth over time. These give impressive graphics for reports but the truth for lower or middle income earners is that the money would frequently be better spent on protecting against standard risks rather than speculating on growth.

 There is the issue that money spent on protection can appear to be wasted if nothing goes wrong. This is surely an issue of education. If the issues were clearly explained, most people would realise the sense behind it. After all, no one complains about money wasted on car insurance or home insurance just because they haven’t had a crash, burglary, or fire. They can see that they are better off without having the disaster and that the cost of insuring against it was money well spent. Clearly people can understand the concept that pooling the risk via insurance means that large amounts of people can protect themselves against major financial outlays by paying a relatively small amount to guard against it.

 Surely the government would be far better off devising a way to increase the amount of protection being bought by those on more modest incomes as a better way of increasing the financial stability of homes throughout the nation. It is the job of the government to work out how best to protect its citizens, and financial security is right up there with health and defence as being of fundamental importance to the quality of life of the populace.

 Unfortunately, that doesn’t appear to be their approach. The new flagship savings announcement is of a ‘Help to Save’ scheme for lower-paid workers, i.e. those receiving universal credit or working tax credits. This scheme means that qualified workers can receive a 50% top-up to regular savings of £50 per month for up to four years, which will give them a maximum savings sum of £3,600 of which £1,200 will be provided by the taxpayer. The Prime Minister stated that the aim was of “helping someone start a savings fund to get them through difficult times”.

 Which sounds great but, in reality, £3,600 is unlikely to last anyone long in the event of a problem. Alternatively, insuring against difficult times would be far more useful in helping people keep their finances in a good financial position, leaving them free to deal with whatever tragic circumstances have caused the situation. Financial security would also be better at supporting them to resume their previous lifestyle or adjust to a new reality. Small amounts of savings in special accounts will never achieve this.

 The government is keen to move people off state provision and making them stand on their own two feet. This is fine as far as it goes, but for lower-paid workers, already in receipt of taxpayer support, the reality is that they will never have the kind of spare cash to save in order to provide them with true security. The only realistic option, if the taxpayer is not to be the ultimate provider of support, is to encourage them together to provide mutual support, as life companies and mutual societies did in the last century. The government needs to look past the glamour of the investment industry and start appreciating the sterling qualities of the protection wallflowers.

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