A flurry of activity in the short-term income protectoin (IP) market means the product is back on the agenda – but should it be? Or is ‘gold standard’ IP the only real option? Harvey Jones reports
Income protection (IP) is an unbeatable long-term insurance product that almost hardly anybody buys.
Short-term income protection (STIP) is an inferior substitute that is, perhaps embarrassingly, proving increasingly popular with brokers and public.
Understandably, the industry is starting to pour greater efforts into the product that does sell, and wearily turning away from the one that doesn’t. But is selling STIP short-changing their clients?
It is hard to blame the insurers for losing patience with long-term IP, the protection industry’s perpetual underachiever.
A CHANGING MARKET
Insurers are now directing their efforts towards STIP, by revamping their existing offerings or bringing new products to market.
In April, DMS revamped its protection policies and bundled them together into its new “gold standard short-term income replacement” plan, with markedly improved terms and conditions.
And in June, adviser portal LifeQuote launched a suite of STIP policies to support its existing IP panels, which it said was a direct response to an increase in broker demand.
Neil McCarthy, LifeQuote sales and marketing director, says house price inflation is driving demand for STIP.
“Buyers are stretching their finances, and this, coupled with the demands of the Mortgage Market Review (MMR), means that shorter-term planning is often taking priority,” he says.
This isn’t the only factor, he continues.
“The buoyant employment market also creates opportunities to change job, which may necessitate a review of any benefits provided, stimulating demand,” McCarthy says.
One reason sales of long-term IP remain low is that most clients can’t imagine themselves falling so ill that they will need to claim for the full life of the policy, McCarthy says.
“Whereas they can imagine being off sick for a year or two following accident or illness,” he says.
The other reason, naturally, is cost.
“IP looks expensive compared to life and even critical illness cover, and clients have ready-made excuses at the back of their minds, such as ‘it will never happen to me’,” McCarthy says. Advisers also have ready-made excuses.
“Many see IP as having heavy underwriting demands, often with loadings and exclusions that have to be explained to clients, and a complicated claims process,” McCarthy says.
A COMPROMISE SOLUTION?
Sluggish sales of long-term IP are forcing insurers to adopt more innovative approaches to STIP, and introduce competitive pricing, he says. McCarthy accepts that STIP is a compromise solution.
“If the gold standard is to provide the maximum benefit that an insurer will allow, then yes, anything providing a lesser benefit is a compromise,” McCarthy argues. “But it is much better to have some cover than nothing at all.”
Many clients who start with STIP may eventually make the step up to full cover, he says.
“STIP is a great introduction to protection and can help build a long-term relationship with the client, which should evolve over time to reflect their changing needs and circumstances,” McCarthy adds.
Steve Devine, chairman of the Protect Association trade body, says advisers instinctively distrust STIP, or any budget or limited type of product.
“Best advice means comprehensive cover and that is only provided by long-term IP,” Devine says. “Advisers would see recommending such limited cover as dangerous and a threat to their client relationship.”
In practice, it isn’t that straightforward. STIP is a useful fallback if IP proves too expensive.
There are no easy answers, Devine admits, and says the PPI mis-selling debacle has further muddied the waters.
“There is a fear within the long-term IP sector of being connected with PPI or anything that might resemble it,” he says. “Who can blame them for that? STIP providers must do more to distance their products from PPI.”
Devine says one possible way forward is to design STIP products that blend other forms of cover and benefits, such as cash plans.
“If your customers have eyes and teeth, there is a very good chance of them claiming on a cash plan and extracting value from the policy,” he says.
He believes the Financial Conduct Authority (FCA) would back such an approach, because it expects products to be transparent and of value to those people that buy them.
Despite adviser scepticism, Devine believes STIP “has a real opportunity to deliver”, provided the industry continues to develop and innovate.
“We just have to be brave and break down a few product silos first,” he says.
Debbie Kennedy, head of protection at Royal London, has seen a marked increase in quote requests and applications for STIP.
“It’s definitely a growing market with advisers and customers seeing it as an alternative to traditional IP,” she says.
Kennedy argues that STIP is a great way for advisers to introduce clients to long-term IP.
“With premiums on average 30-35% lower, it allows customers on a limited budget to have at least some protection, and the opportunity to convert to a full-term plan in the future, maybe when their disposable income is higher,” she says.
Kennedy believes that STIP is especially appropriate for cash-strapped first-time buyers who want to protect their new purchase.
She remains optimistic about the product’s future.
“IP is arguably the foundation of all customers’ protection needs,” Kennedy says. “Royal London is fully expecting the market to develop and for IP products to become more commonplace as awareness improves.”
To succeed, insurers need to be flexible.
“They should allow, for example, switching to full-term cover without further underwriting, so providing valuable cover that can be adapted to customers’ changing needs,” Kennedy says.
Chris McNab, protection product manager at LV=, says brokers shouldn’t just examine the differences between IP and STIP, but between different STIP policies, as they can differ greatly.
By offering a choice of IP and STIP plans, McNab says LV= has driven increased demand for both types of cover.
“This allows advisers to tailor solutions to their customers’ needs can help support the growth of IP overall, and ensure that more benefit from the valuable cover these policies offer,” McNab says.
The PPI mis-selling scandal continues to cast a long-term shadow over short-term IP. A recent report by data provider Timetric said the banks’ “dishonest PPI sales strategy” and subsequent deluge of compensation claims caused the market to plummet in 2009-2013 and again in 2014.
Steffen Mueller, financial services analyst at Timetric, expects further declines in the next four years.
“Although a move towards STIP products has helped some providers to dissociate from the toxic term ‘PPI’, the market’s tarnished reputation continues to strain almost all of creditor insurers’ books,” Mueller says.
Emma Thomson, life office relationship director at specialist advisers LifeSearch, says STIP is far superior to PPI and should prove its worth over time.
“STIP is essentially a proper IP product with just a shorter payment period, with payment options typically being one, two or five years,” Thomson says.
Thomson says there are some good STIP products on the market, and advisers need to seek them out.
“We prefer to recommend insurers such as LV= and Friends Life who limit the payment period to per claim, rather than in total, which sees some insurers cancel the policy as soon as the payment period has been reached,” she says.
Mark Dennison, principal at brokers LightBlue UK, says differences between the various plans and providers underlines the importance of advice.
“Cost often wins when consumers make decisions on paying for protection, because good advisers can direct them to policies with longer benefit periods, and make them aware of the limitations on STIP,” he says.
Kevin Pratt, insurance editor at MoneySuperMaket, says the industry faces a major challenge persuading an “unreceptive and often sceptical market” of the benefits of protection.
But in the meantime, UK remains desperately underprotected.
“We don’t have enough life insurance or critical illness insurance, and most people never give a thought to IP,” Pratt says.
In the circumstances, arguing the toss between IP and STIP may seem rather like splitting hairs.
Pratt says one of the best ways of cutting the cost of long-term IP is to have an extended deferral period on claims. The gap could then be plugged with STIP. “Dovetailing long and short-term products can provide great value-for-money,” Pratt says.
Les Schroeter, head of individual protection at Premier Choice Group, the intermediary, says the attraction of STIP can only be understood in the context of falling sales of long-term IP.
“Sales are woefully below the levels required if we are to ever close the protection gap,” Schroeter says.
STIP is an honest attempt to address the problems with IP, such as cost and complexity.
“Cover is much cheaper and can be easier to obtain for certain occupations. In some cases, it can be easier to claim on a policy as well,” he says.
Smaller sums can be insured with little complexity, Schroeter says, and the client may not even be required to disclose full medical history.
SERVING A PURPOSE
STIP may not be to every broker’s liking, but Schroeter says it serves a genuine purpose and fills a void that desperately needs to be filled. However, brokers must make it quite clear that it is not long-term IP, and clients should strive to move on as soon as their circumstance or finance allows.
Like many in the industry, Schroeter lists one simple argument in favour of STIP: “It is better to have something rather than nothing.”
That isn’t the most dazzling sales pitch for STIP, but it is probably the most appropriate, given the public’s protection blindspot. And that’s the long and short of it.