The benefits of providing healthcare cover for the corporate market have been well-documented in recent months. The focus has been placed firmly on the opportunities IFAs have in extending critical illness, income protection and private medical insurance by considering the sale as part of the concept of employee benefits. Now the spotlight has turned, not before time, to packages designed to protect the self-employed.
But with so many healthcare products on the market, what should the IFA advise the self-employed client to consider. The issue is a complicated one, as while almost all products offer huge advantages to the self-employed, there is the question of the exclusions and restrictions in these products which are not applied to those in the employed ranks.
As Paul Cowman, risk product manager of Guardian Financial Services, explains, it is often difficult for the self-employed to qualify for certain health cover products. This is true of income protection where a history of earnings is needed: “If earnings are low there may be a struggle to get income protection. And because of net relevant earnings, there maybe a difference between what the self-employed declare and what they receive.
“In this case it might be a better bet to use critical illness to fill this gap as it is not income-based. It is obviously not the same thing but some adventurous products cover a lot of the same illnesses and can pay out as regular income rather than a lump sum.”
This monthly payout is often clearly the lump sum split into smaller payments and is not, as income protection is, based on monthly salary levels. However, for some self-employed people, it maybe close to the monthly income level and serve the same purpose as income replacement in the short to medium term.
The difference is that by using CIC, the regular payment will run out when the collective payments equal what would have been the total lump sum payment, while with income protection the income is paid indefinitely.
But product providers do worry about the potential for fraud in relation to self-employed claimants. For instance if the client’s earnings history is deliberately inaccurate, then the benefits they receive by utilising income protection may be greater than their previous earnings actually warranted.
But, as Simon Barwell, personal finance marketing manager at Swiss Life, explains, fraudulent claims among the self-employed are not very common: “The reason for information on earnings history is just as much to protect the person seeking cover as it is to prevent fraudulent claims.
It is important that the person seeking cover does not pay too high a premium based on misleading calculations of their salary.”
Providers have had to look at the self-employed carefully to ensure they have created products that ask for the relevant information. Otherwise problems could easily arise. Imagine the provider only took into account the previous year’s income. This could have been unusually low for a number of reasons and so well below the person’s average annual income. But as fluctuation in annual earnings is common, taking an average earning based on a number of years is clearly advisable.
But all this leaves several reasons why the self-employed may not be eligible for income protection: most commonly, no earnings history or working in an occupation which is considered to be too high risk. If you are a self-employed scaffolder with severe vertigo, then you can forget income protection.
However, as the role of the IFA is to consider the person’s working situation and look after their needs, no option can be ignored. Barwell expands on the point: “If income protection is practical then go for it. But if it is a problem on the question of costs or definitions then critical illness and, of course, life cover come in to the equation.”
The other thing to bear in mind is that most income protection business is in the corporate or group market where the company, not the individual, dips into its usually capacious pockets.
However, there are lower-cost options for those individuals who are concerned about costs. For instance an accident sickness and unemployment policy where the premiums are lower and the policy is more of a broad brush with not as much detail. This could be in the shape of a lesser period for which the payment is made or tougher criteria for claims.
Efforts have been made in the past to make products more affordable by the self-employed, but progress has been slow, as Ronnie Martin, marketing manager of Royal & Sun Alliance, explains: “In the case of income protection, it is about individual underwriting, and so it is difficult to arrange a widespread cover when there is not a common employer.
“We have had approaches from certain federations representing various self-employed professions but it has proved impossible to stack up.”
At Swiss Life, Barwell agrees that so far efforts to sort out deals with federations and unions have proved fruitless, but he is hopeful that things may change in the future. “If, say, all carpenters got together and approached product providers with proposals to protect their members at a reasonable rate then a solution could be found. Trade unions could also play a key role in this. The way the market is moving, we will see more affinity groups actively getting involved. This is already starting to happen.”
Major opportunities to cover the self-employed could also be created if the industry moves towards policies based on tests of activities of daily working (ADWs). At the moment the jury remains out on policies such as UNUM’s Essential Ability Cover which concentrates on tests based on activities of daily living (ADLs) similar to those used to determine long-term care needs. However, there has been talk of adapting ADLs more in line with ADWs.The criticism is that ADLs don’t examine whether someone is incapacitated for work, rather they are designed to establish whether they can look after themselves. While definitions have been tightened somewhat, there is obviously room for further development and progress. So far there is talk of developments in the future but nothing tangible has been put forward.
Despite the problems associated with this sector of the market, at Royal & Sun Alliance, Ronnie Martin stresses that some products are specifically targeted at the self-employed: “We offer integrated deferred benefits. By that I mean that there may be a low payout for the first six months and then an increase as the absence from work gets longer. This type of policy is quite common and is particularly suited to the self-employed. Also, the premiums are often less than for a standard plan.”
At Swiss Life, Barwell has also been targeting of the self-employed, particularly on the question of income protection: “We have been targeting small business and trying to explain how to solve potential problems if a long absence from work is necessary.
He adds: “The IFA’s advice is critical in bringing in this business. We have set up seminars for IFAs to gear them up for this challenge. Market consciousness towards the selfemployed is much greater now than it was a few years ago.”
As far as the IFA is concerned, specific personal factors will inevitably come into play when advising which of the three healthcare products they prioritise. For example: If the client has had a long-term knee problem which will require future treatment or surgery then PMI is a good bet. If there is a family history of heart disease, then critical illness would be the more appropriate choice. A history of back pain, combined with a great urge to play rugby, makes income protection the preferred option.
Of course, as every good IFA will tell you, a combination of all three is the only way of providing the best cover possible but in many cases the costs prove prohibitive.
In terms of qualification for PMI and critical illness, there is no specific criteria which the self-employed would have to satisfy to receive cover – clearly this is because PMI and critical illness are not income-based like income protection.
But, as Barwell explains, the main priority with the self-employed is to look at what combination is needed to protect themselves and their business as effectively as possible. If the client is running a small business there are inevitably concerns about the fragility of the company if the main man or woman is stricken by ill health.
But it is not always just the individual that is at risk, as Ronnie Martin explains: “In a small business where the male partner employs his wife, paying her a minimal salary, this income is lost if he is off sick for a long period of time and has, effectively, been driving the business. With some income protection products this spouse’s salary is included as part of the benefit.”
As far as the IFA is concerned, the real skill is to look at the circumstances of the individual and be prepared to adapt to the situation. For example if a client is in his late 50s, is a self-employed joiner and is looking to retire but is concerned that he may not be able to afford to do so for a number of years, it may be a good bet to take out critical illness cover. Income protection is probably out of the equation because of his profession, but critical illness could provide a substantial lump sum payment if he fell ill and was unable to work. This would be in addition to anything he got for selling the business and could make retirement not only plausible but advisable.
But if the client has a poor medical history, critical illness cover may not be offered. In this case, income protection could be the best option.
For many small businesses that feel vulnerable if a member of staff is a long-term absentee, the best combination is key man/income protection. Key man assurance covers the business and shareholders in the event of the key man dying or being unfit to carry on: income protection can be used if the individual is unfit for work and requires the income stream to be protected.
Lynda Cox of Skandia Life agrees that the larger picture has to be considered: “If you are a couple with the husband self-employed as the breadwinner then obviously the IFA is going to look to advise the male to take out CIC. But IFAs should look further than this.
“Take myself, for example. My husband is a self-employed computer analyst so if I suffer a critical illness he stops work to look after me. As he is self-employed he has no income to fall back on and he is likely to give up work almost immediately after I fall ill. If he goes back to work after six months he has no customers left. What the IFA should look at is CIC for both partners, which offers full protection.”
Another point Cox makes is from a real life case study; “In 1992 we had a customer who was a self-employed man who had just started a recruitment business. He had a heart attack and under our critical illness policy he was paid £100,000. But his customers who knew of his heart attack decided they could not rely on someone who in their eyes was far too prone to ill health.”
In circumstances like these, there are distinct advantages in having CIC. The £100,000 could be used to bring in someone else to keep things ticking over until a return to work is practical or alternatively the person might choose to return and work a shorter less stressful working week. Once again this option is only possible because of the lump sum payment.”
PMI is of course a totally different matter and cannot be adapted to do a similar job to critical illness or income protection. But it can save money for the self-employed, where, after all, time is money.
With PMI, the client buys into a private sector waiting list – which, if it exists, is far less than what they would find within the NHS. This means that rather than having to look to replace income, the client saves losing income by keeping any absence from work to an absolute minimum.
Despite the options that are available, Tim Martineau, an award-winning IFA with London-based firm Brooks MacDonald Gayer, is concerned about the lack of awareness among the selfemployed ranks: “Most clients are not even aware of the insurances available to them. Many will have come from an employed background where they will have had a company package which will have been taken for granted.
“The only part of the package that everyone is aware of is PMI, possibly the least important for a self-employed person. Most people accept that income protection is a necessity. The problem is getting the insurer to provide the right level of cover. Most self-employed people will write their income down as much as possible to pay as little tax as they can. As a result the underwriters will generally only insure the income that is taxable – although some will cover business expenses,” he says.
Martineau is only mildly optimistic that the situation will improve as the self-employed themselves begin to seek advice: “It is my experience that most self-employed clients are so involved in their own businesses that they do not seek out financial advice, however when they do bump into it they do tend to be more discerning.”
This means that the potential of the market is very much related to how all those involved in selling process – IFAs, direct sales and banks &N approach it.
As Barwell points out, the banks are playing a significant role in creating this awareness: “Banks are looking to sell their own products, so clearly they are keen to explain the protection products available to the self-employed. Also, if as is often the case, the self-employed client is looking for a loan to develop the business, then the bank will insist they take life cover but suggest they also think hard about PMI, income protection and critical illness cover.”
The message appears to be that the self-employed are generally becoming aware of the need for protection; the real challenge for the industry lies in creating and maintaining products that can adapt to suit their special needs.