Could the development of a calculator designed to clear up the confusion over income protection and state benefit entitlements give the product the boost that it needs? Former Health Insurance Daily Deputy Editor Tessa Norman reports
Income protection (IP) for individuals is a notoriously undersold product, thanks to a complicated sales process and widespread misunderstanding of the financial reality of being too ill to work.
Many believe that confusion over the interaction between IP and the welfare system – such as a misguided belief that the state will look after people should the worst happen, and fears that taking out insurance will limit their benefit entitlement – particularly hinders take up of the product.
But the Income Protection Task Force – a trade body set up to promote the product to a wider audience – is seeking to change that, with the launch of a new calculator which assesses consumers’ need for IP alongside state provision, and a major consumer awareness campaign.
So what is the scale of the challenge, and what could greater clarity over state benefits mean for IP?
A COMPLEX RELATIONSHIP
“Much of the UK public has ignored insurance in the belief that the state will provide for them and their family if health and times get hard” says Nick Jones, brand and marketing manager at Exeter Family Friendly.
“Unfortunately, many have found out this is not reality the hard way.”
The difficulty lies in the complex and ever changing relationship between IP and state benefits, Jones explains.
“Welfare is a political hot topic and has a habit of changing hugely with Government, meaning today’s system could be gone tomorrow,” he says.
Alan Tyler, a member of the IPTF, agrees that the changing nature of the welfare system makes it “impossible” to predict with any certainty what benefits someone will qualify for if they fall ill in the future.
What the IPTF’s calculator can do, he argues, is clarify what people’s entitlement is in the here and now, and whether or not they would be better off by taking out IP cover.
The application asks for information on consumers’ household earnings, savings and tenure. Household rather than individual information is used as this is the basis on which state benefits are assessed.
The calculator uses this to model what would happen during the first 13 weeks of someone being off sick, and over the next three years, with and without IP cover.
It divides households into three types: those who have a clear need for IP over and above state provision, those for whom IP is unlikely to improve on state benefits, and those who are somewhere in the middle.
The IPTF estimates that 12 to 15 million workers fall into the first group, six to eight million into the second group, and a further six to eight million into the third.
The third group would still experience a shortfall if they relied on state benefits, but not to such an extent that a recommendation for IP is clear cut.
“Particular care needs to be exercised in providing the correct insurance solution for this group”, says Tyler.
“IP is generally sold to higher earners at the moment, but the interaction with state benefits will become more of an issue once the product enters the mass market as we hope it will. We want to avoid at all costs what happened with payment protection insurance.”
So how exactly do state benefits and IP interact?
Those who are ill or disabled can claim Employment and Support Allowance, which pays £71.70 per week during the first 13 weeks.
At the 13-week stage claimants are assessed, and judged either fit for some form of work and placed in the work-related activity group, or judged unlikely to be able to work and placed in the support group.
Work-related activity group claimants receive up to £100.15 a week, while support group claimants receive up to £106.50 per week, depending on the severity of their disability.
The vast majority of IP policyholders will be entitled to ESA for 12 months, but the benefit will only continue beyond that if they qualify for the support group.
Otherwise, they will have to claim means-tested support, which takes into account household savings and income, including that from a partner – or from an IP policy.
Group and individual IP policies are treated differently, however, with claimants penalised more heavily for income from an individual policy.
It is also not entirely clear whether any donations from charities would be taken into account. Experts say this is a grey area but that one-off payments are unlikely to be counted as income, whereas regular payments would be.
“This creates the issue of whether it is worthwhile for some consumers to take out IP if all they do is deprive themselves of mean-tested benefit,” says Tyler.
“As a general guide, those with dependent children and those who rent rather than have a mortgage fare better under the state system. However, a continuing income from a second earner can reduce their benefit or rule them out entirely.”
There are also a number of other benefits to take into account, including the personal independence payment for those with long-term ill health or a disability, carer’s allowance and child benefit – all of which the calculator takes into consideration.
To complicate matters further, it is impossible to predict which, if any, of these benefits consumers would qualify for if they were to fall ill.
Michael Aldridge, sales director at advisers London & Country Mortgages, says: “There are a number of hoops you need to jump through in order to make a successful claim.
“The fact that benefits are means-tested means there is no guarantee that any claim would be successful.”
Aldridge says the IPTF calculator will help to “demystify” the issue, and give advisers and clients the key information needed to make informed decisions about IP cover.
The impact of the calculator will depend on how it is used, however.
The tool is not yet live and the IPTF says it could be used by advisers, employers, or on consumer websites. It has had initial discussions with the Money Advice Service and adviser firms about using the tool on their sites.
And while most welcome the idea, some advisers have raised concerns that the tool could create a mis-selling risk. If an adviser uses it to make a recommendation, for instance, and the state system later changes, the adviser could be accused of giving unsuitable advice.
Tom Baigrie, chief executive of LifeSearch, says: “The potential mis-selling liabilities one incurs in arranging IP are impossible to quantify because one cannot predict the Financial Ombudsman Service’s reaction to a case where the payment of benefits by an insurer causes the loss of benefits from the state.”
Baigrie adds, however, that the FOS says it is yet to see a claim of this kind – and that the IPTF’s tool would reduce the mis-selling risk to advisers rather than increase it by forming part of a compliance trail.
But the tool also has its limitations. It cannot take into account what an individual would receive from their employer in the event of ill health unless they input the information themselves– knowledge few are likely to have without checking with their employer. Although the IPTF says if the tool was used on an employer’s website, it could automatically include the company’s offer.
And there are other factors to take into account when weighing up the need for IP – such as the differences between policies and the occupational health support insurers provide.
Providers offer a range of occupational health services to help support claimants back into work, including employee assistance programmes and in-house rehabilitation teams.
The Government, too, is set to offer greater rehabilitation support to employees, with the launch of an occupational health and advisory service later this year for those off sick for four weeks or more.
First announced in January 2013, the initiative is expected to be rolled out from the autumn and be up and running nationally by April 2015.
The IPTF is also launching a major consumer awareness campaign this year, the Family Support Initiative, which will follow a number of families where the breadwinner has suffered a serious illness or accident.
The families will be supported by a donation, equivalent to a year’s salary, from a trust made up of donations from providers and reinsurers. The campaign plans to follow the families’ progress through digital and broadcast media.
Many hope that such mainstream marketing efforts will help make the public alive to how little the state is guaranteed to provide – but argue the Government needs to meet the industry half way on creating the right messaging.
“The complexity and unpredictability of state benefits – combined with the false impression of adequacy the Department for Work and Pensions allows to be created – makes it far harder for consumers to understand their needs and how best to resolve them,” says LifeSearch’s Baigrie.
“Marketing efforts like the IPTF’s plan to demonstrate the value of IP in real-life circumstances, as well as changing the messaging coming out of Government, is the best way forward.”
Marco Forato, chief marketing officer at Unum, the insurer, argues that extremely low consumer awareness of IP is a far bigger challenge than confusion over the product’s relationship with state benefits.
“The industry should not be sidetracked by trying to explain the advantages and disadvantages of IP versus state benefits for different cases,” he says.
“Our research has shown that we can apply a simple rule-of-thumb – the ‘squeezed middle’ earning more than £25,000 can see incomes fall by up to half if they rely on state benefits and should have financial protection in place. The industry can then focus its efforts on addressing the bigger issue of educating people about IP.”
It is certainly true that confusion over state benefits is not the only challenge the IP sector faces, but let us hope that with the efforts of the IPTF and the backing of the industry, greater clarity will mean an important step forward in more consumers getting the protection they need.