The Office of Fair Trading (OFT) has launched a consultation document on how to protect consumers in the online age. The implications of the discussion emphasise the need for independent, unbiased financial advice to guide consumers on funds investments or purchases of life and critical illness insurance products online.

Earlier this year the Association of British Insurers (ABI) pointed out that consumers buying life and critical illness insurance and other insurances online, rather than with financial advice from an independent financial adviser, run risks in several key areas.

Principally, insurance companies rushing to provide a ‘quick quote’ online may do so without fully evaluating the circumstances and situation of the customer. Some providers make certain assumptions  about the customer, which can be inaccurate or incorrect. The customer, for their part, may have little understanding of the life cover or critical illness insurance policy they are buying.

One specific concern of the OFT is ‘targeted pricing’. Customers can feel seduced by attractive special offers on some life and critical illness insurance policies offered online. However, it may not be clear which of these are included as standard, and which are optional ’add-ons’ that come at extra cost.

Financial advice can also help a customer navigate the sometimes complex maze of terms, conditions and exclusions of life policies, but in particular of critical illness insurance. A simple mistake at the application stage can reduce or void critical illness insurance claims, later on.

Other factors the OFT will consider to protect consumers may include clarifying the levels of protection available for consumer-to-consumer sales, checking on non-compliant websites, and strengthening payment systems for online purchases.

While 40% of people admit they have made no provision in their financial planning to cope with unexpected future eventualities, this figure rises to 46% among those earning less than £20,000 per year.

While 34% of people said they were satisfied with their financial situation, this was much more likely to be heard from those earning over £20,000, of whom 43% agreed, than from those earning less, of whom only 31% agreed.

Furthermore, 67% of respondents said they would cope badly financially if they lost their job, and half of those said they would cope ‘very badly’, said the ABI.

Savings accounts continue to disappoint

Low interest rates are doing little to encourage savers, with the average interest rate in a cash ISA now languishing at 0.63%. Savers in instant access accounts, including bank current accounts, are even worse off, with average interest rates of just 0.19%, said the ABI.

Savings in pensions and equities, on the other hand, have recovered as London’s FTSE share index has risen by 59% in the last year. In response, the number of those who believe that the benefits of saving have diminished has fallen from 73% before Christmas to 55% in March 2010, indicating a gradual return of trust to the savings market. Today, 11% of savers believe the value of savings has actually increased, compared with just 7% at the end of 2009, the ABI said.

Looking at insurance products, the ABI revealed that while life cover is still the most popular form of insurance, less than half of people (46%) have a policy, followed by 16% who have critical illness cover, 15% with mortgage payment protection insurance, and 15% with private medical insurance.

The pitfalls of arranging your own life insurance cover, health insurance, home insurance and motor insurance online or via price comparison websites have been highlighted in new guidelines by the Association of British Insurers (ABI).

Insurers, eager to provide a rapid-response “quick quote”, sometimes fail to ensure that the customer understands the terms of the insurance cover being offered. Customers buying life insurance and other insurances online, rather than with the help of a financial adviser, must currently beware of inadequate information in four key areas:

• Insurance policy information: the key features of the life insurance or health policy may not be clear online
• Which aspects of the insurance policy are “add-ons”: not all features of an insurance policy may come as standard, some may need to be specially requested, at extra cost
• Excess levels (motor cover): voluntary or compulsory excess levels may not be made clear online
• Referrals: where a customer cannot be covered, he should, but may not, be given a clear referral to an alternative provider

Furthermore, online applicants are often not informed of assumptions that the lender makes about them, when compiling their quote, and may be unaware of the exclusions contained in the “small print” of a life insurance policy, a health insurance policy, or home and motor cover.

By buying life insurance through a financial adviser, however, consumers will have the conditions and exclusions of their policy explained to them, so that they are fully aware of what is covered. An adviser will also guide them through the sometimes complex application process, which can be a minefield for the uninitiated. Neglecting to provide a specific, perhaps minor detail of your past health history can be enough to invalidate a future claim.

Furthermore, an independent adviser can take a ‘whole of market’ approach to ensure that he locates the life insurance policy that is right for you.

The ABI has urged pensions providers to make greater efforts to remind savers of their right to ‘shop around’ when purchasing their pension annuities, and assist them to maximise their retirement income.

In new guidelines published this month, the ABI has requested a general overhaul of the quality and nature of information on pension annuity options provided to those approaching retirement, in the ‘wake-up’ packs they receive from their pensions provider.

The new guidelines echo a similar call that was made by the ABI in the early part of this year, and indicate that pensions providers are still not going far enough to make customers aware of the choice of pension annuity products available to them.

The ABI has requested substantial improvements from pensions providers in six key areas:

• Providers should stress in their communication the importance of the information contained in the wake-up pack
• Make clear the Open Market Option (OMO) or right to ‘shop around’ for pension annuities, and stress the importance and benefits of doing so
• Clarity on the timeline for taking benefits
• Promotion of the Pension Advisory Service’s online financial planner
• A longer lead time for customers than the four or six months’ notice currently given by the arrival of the wake-up pack
• Improvement of the OMO transfer processes

“This new guidance will help ensure people get clear, valuable and understandable information at the point when they are making hugely important decisions about how to turn their pension savings into an income in retirement,” said the ABI.

In its new document ‘People Need Financial Protection’, the ABI refers to the current ‘uncertain economic outlook’ and warns consumers against ‘a sudden loss of income, perhaps through unemployment, ill-health, or even the unexpected loss of a family breadwinner’. 

In addition to health issues, insuring your ability to repay debts was crucial in order to avoid damaging your credit rating, and therefore your ability to borrow money in the future, the ABI said. 

The ABI recommended the following insurances as part of a sustainable and balanced household financial plan. 

Life Insurance – To provide a tax-free lump sum or regular income in the event of death

Critical Illness Insurance – To pay a tax-free lump sum if you suffer a specified critical illness such as cancer, heart attack, or stroke

Income Protection Insurance – Pays a regular income if you are rendered unable to work through illness  or injury

 Unemployment Cover – Pays a regular income or covers debt or mortgage repayments if you lose your job through no fault of your own 

Consumers without a ‘buffer’ of savings to sustain them in the event of unemployment were particularly well-advised to ensure they had adequate life cover, health cover, and criticial illness insurance cover, said the ABI.

The comments followed a case where an insurer turned down a payment protection insurance (PPI) claim, quoting a clause blocking claims where the insured ‘became aware of any increase in the risk of unemployment’ during the first three months of the policy. 

The customer took his claim to the Financial Ombudsman Service (FOS), which upheld his complaint. The FOS criticised insurers over vague wording of clauses which could be used to turn down valid claims. 

Clauses excluding cover to individuals who become ‘aware of any increase in the possibility of redundancy’ are designed to protect insurers against claims from policyholders who took out cover, knowing that they were likely to lose their jobs. 

However, the FOS said the wording of some PPI contracts was so vague that any downturn in the UK economy during the first three months of a policy could be interpreted as rendering customers aware of the possibility of redundancy. This could then exclude them from cover. 

Consumer groups such as ‘Which?’ have stated that in the current general economic downturn, the vague wording of exclusion clauses could be used by insurers to turn down valid claims.

The comments highlighted the need for insurance applicants to have their financial adviser clearly explain the ‘small print’ in their insurance policy.

The ABI pointed out that some insurers do ask a specific question in their insurance application form, to assess if the applicant has any awareness that he is likely to be made redundant. It was important for applicants to understand that such knowledge could void their policy, the ABI stated.

Defined contribution pension schemes are those into which an employer pays a regular contribution, fixed as an amount or percentage of the employee member’s pay.

Under pensions law, the ‘Open Market Option’ enshrines the employee’s right to look at all pension annuities available on the market, as part of his retirement planning. The ABI survey revealed that of those surveyed, only 62% of people had been aware of this.

Your pension fund manager should provide you with an estimate of what your pension fund is worth, six months before you are due to retire. Shopping around for the right pension annuity for your retirement is not only advisable but crucial, given that once your choice is made, there is no going back. You are required to stay with your chosen annuity product for life.

What type of annuity?

There are many annuity providers on the market, and there is no requirement to buy your annuity from the company that managed your pension fund. There are also many types of pension annuity available.

The first choice to make is to identify who should benefit from your pension. A single life pension annuity pays out only to you, and ceases when you die. However there is also the joint life annuity, which will continue to pay your spouse after your death, until they die, or can also pay your children, for an agreed term.

The with-profits pensions annuity continues to invest your pension in funds, and as such can achieve a higher income for you year upon year – although your income also has the potential to fall, depending on how those investments perform. However, some with-profits annuities have a guaranteed minimum payment built-in.

A flexible annuity also invests your pension in funds, and links your income to the performance of those funds. The very popular ‘flexible’ option refers to the fact that you can, within limits, vary the amount of income you take, from month to month.

An enhanced pension annuity offers a higher regular income to those with health problems, based on the assumption that they will not be drawing their pension for as long as a person in full health.

But using the lump sum from your pension fund is not the only way to purchase an annuity. If you have savings or funds that are not invested in a pension fund, they can be used to purchase an immediate life annuity, which effectively turns your savings into a regular lifetime income.

The ABI consumer research surveyed over 2,000 defined contribution pension customers in May and June 2009.

This was the recent warning from the Association of British Insurers (ABI) highlighting the dangers for consumers of cancelling life insurance and home insurance cover, as they tighten their belts in the current financial climate.

New figures released today by the ABI show that in the past year, 13% of people have cancelled their life insurance cover in a bid to cut their spending.

A further 21% have said they are ‘seriously considering’ reducing the amount they save, or stopping saving altogether, while, at the same time, 45% of people would like to be able to save more.

Nearly a quarter of people have cancelled or not renewed home contents insurance, and 17% have cancelled or not renewed building contents cover.

As a result of such financial economy measures, nearly half of those surveyed (49%) said that they were now concerned at their inability to cope with an unexpected event which their insurance would have covered.

Shop around for your insurance cover!

The ABI in a statement pointed out that ‘the insurance market remains very competitive, so shopping around can help you get a good deal, while ensuring that you are not at the mercy of the unexpected.”

Ditching insurance or reducing cover should only be ‘a last resort’, the ABI claimed.

ABI survey was carried out at the beginning of this month, using a sample group of 2.072 adults sourced throughout the UK.

They say that the ostrich, rather than facing up to a threat or a problem, buries its head in the sand, in the hope that the problem will simply go away.

Why does ‘ostrich syndrome’ appear to touch a nerve with all of us? Perhaps because it is an inclination with which we all identify – the inclination to let things drift, rather than take action to rectify them.

Evidence of ‘ostrich syndrome’ came up again this week, as new data showed that many of us are unhappy with our retirement planning, but are unwilling (or unable) to do anything about it.

The Association of British Insurers (ABI) questioned over 2,000 adults throughout the UK and discovered that, from this random sample, 44% of women and 38% of men are concerned that their retirement planning and pensions provision may be inadequate.

The new information seems to confirm the findings of a recent BBC survey, which suggested that half of UK adults between 20 and 60 are setting aside nothing for their retirement.

One compelling image that sums up the need to take action about your pension features in a current tv advert. A woman climbs on to a high diving board 10m above a swimming pool. As she prepares to dive, we see that there is no water in the pool below.

The message is clear: moving towards our retirement without savings or other provisions is (financially) as dangerous as launching ourselves earthward from a diving board, with nothing to break our fall.

Act now, to fill your ‘pension’ swimming pool, before it’s too late!