In today’s high-pressure world, where everyone knows they are risking their future lifestyle if they fail to meet repayments on any financial product, it would seem the need for income protection (IP) was more obvious than ever. Once covered, the insurer will pay a proportion of income until recovery or death – or policy end. But anyone who feels safe in the knowledge that the state will pick up the bill if the unthinkable happens, should think again. The government does offer incapacity benefit, but this only provides a basic subsistence level of income that will certainly not keep people in the lifestyles to which they are accustomed.
With this in mind, impartial observers would naturally assume that IP policies are widespread. But recent findings show that only 11 per cent of Britain’s working population has some form of IP (excluding the small number of people covered by their employers). And, despite frequent initiatives that prompt insiders to predict the product is about to take off, sales have never quite gone through the roof.
But why is this? The total lack of publicity about state benefits is to blame, according to Zurich IFA’s protection marketing director, John Ravenscroft. “If people realised how little money they would receive from the state if they were unable to work, there would be an outcry,” he says. “As an industry, I think we spend too much time promoting critical illness cover (CIC), when we should be doing far more to protect incomes. People put huge amounts of money into pension schemes, and yet do so little to protect their income during the vital years when financial commitments are usually heaviest.”
Ravenscroft also questions why the government has been encouraging mortgage lenders to push accident sickness and unemployment policies, which only last one or two years, when IP could serve a similar purpose more effectively for a longer period of time.
After 1998’s Office of Fair Trading report concluded that IP was a difficult product for consumers to understand, the Association of British Insurers (ABI) has been working to standardise core terms and definitions across the industry. It produced a comprehensive statement of best practice last year, and all ABI-registered providers had to bring their literature into line with this by the end of February 2000. All the IP providers consulted for this feature are proud to announce meeting this deadline, and now boast particularly clear documentation that allows customers to see exactly what they get for their money.
UNUM was the first company to fall into line with the statement of best practice, according to public relations officer Andrew Smith, issuing its key features document in September 1999. “As far as UNUM is concerned,” he says, “anything that helps inspire consumer confidence is positive. And plain, simple literature that allows people to compare products from different providers should go a long way to doing that.”
Innovative products will obviously be at the forefront of all companies’ campaigns to boost IP sales, and there is a growing list of providers with such policies on the market. “Traditional IP can prove expensive depending on your job,” says Smith. “And people in high-risk professions, such as carpenters or welders, can find premiums on own occupation cover prohibitive. To counter this, UNUM offers a blue-collar budget package, Essential Ability Cover, that removes occupation from the assessment process.
“This literally halves the cost of IP for blue-collar workers, although the cover is not as comprehensive as an own occupation policy, which we would always recommend if people can afford it.”
UNUM introduced Essential Ability Cover in September 1997, and it now represents 25 per cent of the company’s individual IP sales. Although other providers are beginning to offer similar products, the fact it took them nearly two years to catch up is surprising, according to Smith.
He says: “IP is often accused of being targeted towards middle-class males in the south-east of England, and policies like Essential Ability Cover can open it up to a higher percentage of the workforce.
“Now the government is starting to admit the importance of self-provision, and plans to reduce incapacity benefit even further. Based on 1998/99 prices, estimates put incapacity benefit expenses at £6.5bn for 2001/2, compared to £8.6bn in 1994/5. There is a huge scope of potential for the private insurance industry.”
This potential has not gone unnoticed by Scottish Provident either, where innovation in the IP arena is high on the agenda. Product marketing manager Roger Edwards explains: “While most people can appreciate the benefits of IP, it has always been seen as complicated because of the number of variables that can affect a policy. Hence the huge success of CIC, which offers a one-off, lump-sum payment. Our strategy is to promote, and encourage IFAs to sell, IP and CIC as complementary rather than alternatives – both are part of our network of Self Assurance products from which customers can choose using the `Menu of Benefits’.” This menu, which won Millennium Product Status for innovation, works on a’pick and mix’ basis. Consumers wanting more than one type of protection, IP and CIC, for example, can have both elements written in one policy, cutting out double underwriting fees, double direct debits, and so on.
“A major difficulty with any type of protection is that people don’t understand how much it will cost,” adds Edwards. “£150 per month for an IP premium is expensive and can put people off. But, with the menu system, if the client can’t afford to protect 65 per cent of their salary, they can choose to cover their mortgage payments at first and add more in later. The advantage of this is that they are not stuck with the policy they start with. If circumstances change, they can increase existing cover or choose other products from the menu-it includes IP, stand-alone and accelerated CIC, death cover, cash plans, and unemployment benefit-and tailor the policy to suit their needs.”
Of the 2,600 Self Assurance policies that Scottish Provident writes each week, Edwards reports that around 10 per cent currently include IP, compared to 50 per cent with CIC. But he predicts this ratio will improve over the coming months, not least because `full’ IP has only been on the menu since last September, when it replaced a cut-down version focusing on mortgages.
Many IP providers are also looking to embrace technology in their attempts to improve sales. In addition to the eXchange and its specialist IFA service eXweb, which both contain information on a range of financial products, some companies have developed their own desktop CD-ROM-based quotes systems for use by IFAs-notable examples include UNUM’s ProductPartner and Zurich IFAs QuoteZ.
According to Smith, around 3,000 IFAs are currently making use of the free-of-charge ProductPartner, which enables them to access quotes instantaneously when dealing with clients.
“Before this software was available,” he says, “IFAs had to note down a customer’s requirements and get a quote for them over the next few days. With ProductPartner, they can give a client sitting next to them an immediate quote, and also amend the policy on screen to see how various changes will affect the premiums.”
Ravenscroft is equally positive about the potential impact of QuoteZ. “This is an extremely user-friendly piece of software that IFAs can access from any laptop, anywhere, without the restriction of having to find a telephone connection,” he says. “It can provide IFAs with the most up-to-date information available, including all our sales presentations, putting them in the best possible position to sell the product.”
It seems then that with newly clarified and unified literature, innovative underwriting, and a technological helping hand, IP, the industry’s perennial Cinderella product, might finally make it to the ball.
Rosalind Pearson, personal finance research and development manager for Swiss Life, certainly believes this may be the case: “IP has never quite caught the public’s imagination like CIC, despite the fact that IP is a more focused and better targeted product.
“But with the government intent on curbing the `malingerers on sick pay’, it looks like there will be plenty of opportunities for industry partnerships with the government in the future – on the group IP side as well as individual.”
However, despite the generally positive feelings surrounding IP at the moment, one man not willing to don his tuxedo quite yet is Pearl Assurance’s group product manager Paul Cowman. “The problem is that people, no longer naive enough to think nothing bad can ever happen to them, still believe their employer or the state will be there if it does,” he says. “And it will take more than calling the product IP rather than permanent health insurance to change this.
“While the industry has done a lot to make IP clearer, it is still difficult to understand, people don’t realise they need it, and so they don’t buy it. For sales to take off, one of two things must happen. Either the government will admit it cannot afford to pay the incapacity benefit bill-which would go a long way to making it unelectable – or the industry will have to come together and tell the bitter truth: if you’re off work and don’t have IP, your home is at risk.”