Inflation has reached a near 30-year high, placing millions of households under huge financial pressure and prompting many to explore ways they may be able to reduce their outgoings.

As mortgage advisers, we can help borrowers manage what will usually be their biggest monthly outgoing, their mortgage, but it’s also vital to ensure they remain protected in case they lose their income due to illness or injury.

The pandemic has highlighted that it’s impossible for any of us to plan for the future with any kind of certainty and that it’s crucial to be prepared for every eventuality. With living costs expected to soar even higher due to the massive increase in energy bills expected in April, along with a 1.25 percentage point increase in National Insurance Contributions plus rising phone and broadband bills, it’s hardly surprising that so many people are worrying about their financial future.

Be ready to help if customer policies look set to lapse

Some customers may be tempted to cut back on protection so they can save on premiums, or to let policies lapse without renewing cover, but having a financial safety net is arguably more important than ever.

At a time when inflation is high, the value of indexation becomes even more apparent. Indexation means the level of cover retains its real value over time. This could prove invaluable in the event of a claim, providing the policyholder with peace of mind that their payouts will have risen in line with living costs, avoiding a shortfall in the event of a future claim.

It’s hardly surprising that so many people are worrying about their financial future

However, there’s no escaping the fact that premiums for index-linked plans will rise along with the level of cover, which could cause real difficulties for policyholders where affordability is being squeezed. As a result, what should be seen as a benefit of the policy may provoke a different reaction and some may be considering refusing indexation or even cancelling to keep costs down.

Explaining the options

During these difficult times, brokers can provide vital reassurance to those who aren’t sure their current protection options are still viable.

A rising premium could result in customers questioning whether to keep their policy. However, not being able to afford indexation, or even to cover existing premiums, doesn’t mean customers should forgo protection altogether, or even lose out on the chance to index-link cover in future.

Understanding provider policies to help customers find a solution could prove invaluable

Advisers can help customers face these potentially difficult decisions and understand whether the future value that policies can provide via indexation is worth them tightening their belts further now. That conversation will be different for every person but it’s useful for customers to know the available options, whatever their individual circumstances.

Some customers may be comfortable paying extra for index-linked cover on the grounds that the benefit is able to keep pace with inflation. But brokers will be aware that, for many who are already feeling the pinch, a rise in monthly cost simply won’t be an option they can afford.

These customers need to understand what the options are and advisers can help them navigate a more appropriate course of action. For example, they could decline indexation and avoid the increase in premiums on the understanding that the level of cover will simply remain the same.

This doesn’t necessarily mean they can’t opt for indexation in the future, when their financial situation allows, because many providers will offer it again in years to come even if it’s declined now.

Some clients may be considering refusing indexation or even cancelling to keep costs down

Reviewing but keeping some cover in place at a more affordable level is a better outcome than cancelling and having no protection at all. Understanding provider policies to help customers find a solution could prove invaluable in achieving that aim.

Provider support

If customers are unable to keep up with premiums as they stand, it could even be worth talking to providers about any support they can offer so that cover doesn’t have to cease. Many providers recognised the importance of doing this during the pandemic when customers were furloughed. Allowing them to keep their cover or reduce it for a short period provided support during times of hardship, and several providers continue to offer these options to those in financial difficulty on a case-by-case basis.

For many customers who are already feeling the pinch, a rise in monthly cost simply won’t be an option they can afford

Advisers will play a crucial role in standing ready to help where customer policies look set to lapse. Customer awareness of the need for financial resilience has been heightened by the pandemic, boosting understanding of the value of protection.

Unfortunately, the current squeeze on finances could test that understanding and highlights once again that advice for customers looking to maximise cover on a strict budget will be key.

David Hollingworth is associate director, communications, at L&C Mortgages