What’s in a name? If you are in the business of selling protection, an awful lot. Especially if you are selling income protection (IP) and the public thinks you are flogging them payment protection insurance (PPI).
The two products look alike, they sound alike, and when PPI scandal broke, many customers could not tell them apart. The fact that IP is a vastly superior product was lost in the noise.
Now the protection industry is in danger of adding to customer confusion (and its own misery), by launching an IP spin-off called short-term income protection (STIP).
STIP is a hybrid product, the result of cross-breeding IP and PPI. It aims to offer the cover and security of long-term IP, but without the hefty price tag, and with simpler, faster underwriting.
Like PPI, it only pays claims for a set term, typically two years. Many STIP policies also have reviewable premiums. Some even throw in unemployment cover as well. Hopefully, PPI’s bad traits have been bred out, notably the wide exclusions and even wider salesmen.
In an ideal world, every protection adviser would sell long-term IP, says Stephen Cowdell, protection consultant at Assured Futures.
“IP is superior to STIP, because it gives you much greater protection in case of serious illness,” he says. “We sell long-term IP to professional clients. They have worked hard to get where they are, and want to protect their income for life, not just two years.”
But not everybody can afford this level of cover.
“I’m a firm believer in the principle that some cover is better than none,” Cowdell adds. “I’m happy to sell STIP to clients who can’t afford to buy IP, but I certainly wouldn’t sell them PPI.”
Cowdell regularly sells Exeter Family Friendly’s Bills & Things, which offers a maximum claims period of one or two years.
“It offers ‘own occupation’ cover with no financial underwriting, which is attractive to, say, builders and skilled workers who can’t get this option from traditional insurers,” he says.
Tom Connor, director of health insurance brokers Drewberry, sells long-term IP when possible, STIP when it is not.
“STIP is affordable, and fills a nice gap,” he says. “It would cost a 35-year-old accountant around £18 a month for cover worth £2,000 a month on a 13-week deferred period. Long-term IP would cost him nearly £39 a month.”
STIP also offers valuable cover for people in manual occupations, who may suffer a series of short-term injuries.
“But if the policyholder has a long-term problem, such as a chronic condition or multiple sclerosis, it won’t do the job,” Connor says. “Advisers have to realise this, and so do their clients.”
His favourite STIP policy is the LV= Budget Income Protection plan.
“This allows you to claim for up to 24 months for one condition, and another 24 months for a new claim,” Connor says. “That claim may be for a new condition, or the same condition where they could return to work for at least six months. That’s how it should be. Friends Life, by comparison, will only pay out for 24 months in total.”
Connor would like to see more insurers launch STIP products.
“I suspect some big names are worried about creating bad vibes around their brand, if they regularly have to cut off ongoing claims after two years,” he says.
Others are worried that too many insurers have been piling into this new product offering. The number of STIP plans doubled from 20 to 39 in the two years to 2011, according to analyst Defaqto, raising fears that it was becoming the next PPI. The Financial Services Authority took notice, and last November warned that it will take a “more intrusive” approach to payment protection products, including STIP.
The regulator is right to be concerned, says Ian Smart, head of product development and technical support for life offices Bright Grey and Scottish Provident.
“Bright Grey has offered a form of STIP since 2003,” Smart says. “Our plan is written as a long-time IP policy, with premiums guaranteed throughout the term. Most new STIP policies are annually renewable general insurance contracts, which means the provider can cancel the policy or change the premium every year.”
“Some STIP plans are uncomfortably close to PPI,” Smart says. “The regulator should keep a watching brief to make sure the sales practices that tainted PPI don’t simply continue under another name.”
Many advisers remain “instinctively suspicious” about STIP, says Emma Walker at Moneysupermarket.com, which now has a STIP price comparison channel.
“They feel anything that looks vaguely like PPI is bad, and won’t offer it to their clients,” Walker says. “This could be doing them a serious disservice. STIP meets the need for a budget product that pays for the early critical time when the policyholder cannot work. Many plans also include unemployment cover, which is vital in the current economic climate.”
Advisers should not tar STIP with the same brush as PPI, Walker stresses.
“Some salesmen used scare tactics to sell PPI, but that shouldn’t happen with STIP, because it isn’t sold alongside any other product or transaction” she says. “The decision is up to the consumer.”
STIP is a much better product than PPI, she adds.
“It is more flexible, allowing customers to change benefit levels as their income or commitments change,” Walker says. “Some plans allow policyholders to change the risks covered, benefit duration and excess period.”
Walker suggests advisers could consider selling a combination of the two.
“They could sell STIP to cover short-term illness and unemployment, and a long-term IP policy with a deferred period that kicks in after 12 or 24 months, for more serious illnesses,” she says.
Advisers have to pick their way carefully through the different STIP offerings, says Mark Jones, head of protection at LV=.
“Features all vary from provider to provider,” he says. “Some are non-underwritten, have standard exclusions or only allow one claim per policy. We offer identical terms and conditions to our long-term IP product, including full underwriting, guaranteed premiums and a choice of waiting periods.”
NEXT BEST THING?
After years of struggling to revive interest in IP, the industry is unashamedly lowering its sights by offering STIP. With the recession still raging, insurers can no longer seek perfection, says Nick Jones, brand and marketing manager at Exeter Family Friendly, the provider.
“We live in a world where consumers have limited budgets and limited attention spans,” he says. “STIP is a more pragmatic choice, because it reduces premiums, removes underwriting complexity and simplifies the claims process.”
This is not a problem, as long as the customer knows what they are buying.
“Advisers must explain the difference between a fully reviewable plan where insurers can move the goalposts on an annual basis, and a long-term plan where the terms and conditions are set in stone,” Jones continues.
A broker who sells a client a short-term policy can always sell long-term IP later, he explains.
“Lots of people aspire to drive an Aston Martin, but very few buy one as their first car,” Jones says. “If STIP opens up some form of protection to a wider audience, that can only be a good thing.”
The gap is not necessarily too wide to bridge, he argues.
“A 30-year-old taxi driver buying cover worth £900 a month on a four-week waiting period would pay £19.99 a month for our ‘Bills & Things’ policy, and £28.97 for our long-term IP plan Pure Protection,” he says.
However, Jones accepts that STIP is “closer to the disgraced PPI than many would like”.
“We have to fight a reputation issue, but this is a fight we will need to take at some point if we believe our products are superior and deliver greater value to our customers,” he explains.
Insurers have not given up the fight for long-term IP, says Nick Homer, proposition development manager for protection at Zurich Insurance Group.
“It is arguably the most important insurance you can buy,” Homer says. “Your income pays for everything, including other forms of insurance. If you can’t work, your lifestyle will go up in smoke.”
The drawback is that it is almost too generous.
“Paying your income until retirement age is amazing, but that makes IP too expensive for many people,” he says.
Other hurdles are more easily overcome, such as the traditionally lengthy application process for IP.
“That is changing, with new online systems, underwriting practices and automation,” Homer says. “IP will only become more valuable as state provision is eroded. I still believe the industry can make a go of it.”
So, how crucial is the name? Very, if you are designing a new protection product, says Marco Forato, chief marketing officer at Unum, the provider. “The industry is only adding to that confusion, by repackaging a cleaned-up PPI as STIP, and stealing IP’s clothing,” Forato says.
Unum has been piloting a new business protection product that is designed to fill the six-month deferral period between an employee falling ill and being able to claim on their group IP policy. It originally planned to name the product short-term income protection, before realising it only added to the confusion.
“We have now ruled out STIP and are exploring other names instead,” he says. “We may call it short-term sick pay protection, for example.”
IP has always struggled with its name. When it was called permanent health insurance, it was confused with private medical insurance. Re-labelling it ‘income protection’ seemed wise at the time, but has only stirred up a new storm.
What’s in a name? Don’t ask.