There was a time when individual income protection showed such promise. When the Government changed the incapacity benefit rules, and made premiums for income protection tax free a year later, the market looked set for take-off.
And it did. Figures released by underwriters ERC Frankona in May show an upward leap of nearly 30% from 117,000 policies sold in 1995 to 150,000 in 1996. But last year saw a downturn to 140,000 new policies.
Views differ widely on why this should be the case. As Diana Harding, spokesperson for Canada Life, points out: “It is probably one of the most undersold products in the industry and it is a very stagnant market at the moment. It is a shame because it is such a valuable product. And when you think that for the average person to insure half their pre-disability income costs about 1 % of their take-home pay, it is a small premium for that peace of mind. This is the message that we are continually trying to drive home.”
Driving home the message is probably one of the best ways for intermediaries to increase sales. Many people in employment do not see the importance of income protection and, if they do, they feel it is up to their employer to provide it for them.
The product is also extremely important – some say essential – for the self-employed. For a roofing contractor, for example, there is no alternative: an accident would not only threaten their income, it could also jeopardise their entire business. Yet, as Rory McLean, managing director of London-based Chesham Lyell, points out: “There are always 101 reasons why people say they do not wish to take out income protection. The next holiday, or even the next meal on the table, is all too often a more important priority.”
To address this, some providers are bringing out more innovative versions of income protection.
“It’s a very human reaction to keep your fingers crossed and hope for the best, but you don’t have to insure the whole lot,” says Avenda Burnell Walsh, corporate communications manager at Permanent Health. “The individual can insure just a certain percentage of salary, and this is one of the tacks that an IFA can take to encourage sales.”
Permanent’s budget protection scheme, introduced last year, which has effectively halved the premiums, means that the individual has an income for two years following a claim. “This would give a self employed person time to work out what they are going to do next, sell the business or whatever. It offers a good breathing space. So it can be argued that going for a budget plan is better than going for nothing,” says Burnell Walsh.
Steve Cooper, of specialist brokerage Morgan Barclay Corporate Medical, suggests ways in which individuals can reduce premiums by opting for a deferred period.
“If a client decides that income protection is prohibitively expensive, I might advise them to build up a nest egg to tide them over for a given length of time, say three months, as the premiums for a deferred period will appear less daunting,” he says.
Cooper believes in offering the client the choice from a range of options, and is only too aware of the difficulty of covering for all eventualities. He would like to see one affordable product that that covers overall needs.
Glen Smith, managing director of intermediaries Healthcare Partners, based in Bushey, Hertfordshire, also believes there are inherent problems in the structure of the market which would benefit from being simplified. “Insurers should offer a blend of products that are linked,” he says. “When we get enquiries from people in high risk occupations, they are probably going to need a sickness and accident plan. It is important not to look at income protection or critical illness in isolation, they should really be hand in hand.”
Some insurance providers have recognised this and are making headway in developing products that will suit an individual’s requirements while reducing some of the set up and administration charges normally associated with taking out more than one policy.
Scottish Provident’s decision three to four years ago to focus on income protection led in March 1996 to the launch of Self Assurance Term. This policy is based around term assurance with a menu of benefits whereby the intermediary can select a combination of critical illness, death benefit and income protection to meet the needs of any individual client.
“We recognised a problem in the complexity of the market, and that the selling process is potentially creating a barrier because it’s putting the benefit across as being expensive,” says product marketing manager (protection), Roger Edwards. “People may initially just need to ensure that the absolute essentials are covered, rather than the full amount. The angle we came up with was to encourage people to take out a policy to replace expenditure rather than income. This results in a lower initial premium that makes the product more attractive. Then, when they are more comfortable with the concept, it maybe easier for the IFA to get them to increase cover at a later stage.”
McLean of Chesham Lyall suggests that part of the problem in income protection sales lies in underwriting.
“Many people who want to buy income protection may already have a medical history and have the feeling that something could go wrong with them, and this is an unattractive proposition for the underwriter. It’s a Catch-22 situation. The marketplace that wants it isn’t able to get it, and those who can have it aren’t really interested,” he says.
“It’s always a criticism that underwriting is tough generally,” agrees Harding. “I think it’s because exposure is so much greater compared to other benefits such as life cover, which involves just a one-off lump sum payment. People forget that the potential liability in income protection cases can be huge. If you took, say, a 30-year-old earning 00,000,50% of income would amount to about half a million pounds if they couldn’t work again. In addition, you can be paying out on what can appear to be quite trivial things, for example, for a builder with a bad back, this could be a very lengthy claim. So it’s quite risky and the underwriting criteria has to be a bit tighter than where you are paying a one off sum and that’s the end of it.” Despite the downturn in income protection sales, few would argue against its importance in financial planning. Burnell Walsh considers it to so vital that she even encourages IFAs to get their clients to sign a disclaimer if protection advice is given but not taken up. This, she advises, could well cause the client to think again.
“The disclaimer should simply state that the IFA has discussed both the costs and benefits of income protection but the client does not wish to take a policy at this time. The IFA should then keep this on file to protect against any litigation in the future,” she says.
I would advise IFAs to place income protection at or near to top of their checklist when formulating any financial plan for a client,” she continues. “This not only protects the client’s income, but also the IFA’s, because savings plans are often the first thing to go if sickness or accident affects the family income.”
Actively promoting income protection can reinforce your commitment to its importance, according to Burnell Walsh. Creating a mailing can involve relatively little outlay if you draw upon your own database and mail merge facility and use the free literature from an insurer.
Clare Goodfellow, marketing manager at Zurich Life, suggests IFAs identify the self-employed in particular, as this group is especially vulnerable. Although money tends to be tight, these clients will realise what would happen if they were ill. Goodfellow takes the marketing idea a step further by suggesting some PR with local newspapers, perhaps by doing a question and answer section. To help IFAs in this area, Zurich has produced a guide on how to get into the local press. But, like Burnell Walsh, Goodfellow stresses one of the most effective ways to promote income protection is to stress to the client the impact of loss of earnings when set against state benefits.
“I find the static nature of the market quite worrying”, she says. “I believe that one of the major reasons is that it is easier to sell the concept of a lump sum cover, as with a critical illness policy, but people do not always realise that a regular income over a long period of time can far outweigh the benefits of a one-off payment.”
She adds: “And there are so many illnesses that are not covered under a CI policy. Stress is just one example – and this is an area where we receive a lot of claims – and the individual may not even necessarily get state benefit.”
The IFA should also make sure that their clients are fully aware of the state benefit alternative. By using a pro-forma to list their outgoings (not forgetting business expenses for the self-employed) and comparing this to the state incapacity benefit, they will see for themselves that the shortfall could be staggering.
Like the Tory administration before it, the Labour Government is stressing the need for individuals to take responsibility for their own future well-being. Indications in the health insurance market suggest that the man in the street is finally taking notice, which could have more positive implications for income protection.
“The flavour of the `80s and first half of the `90s was investment, and people were very party to the `spend, spend and make more money’ ethos, says Burnell Walsh. “But I would predict that for the next decade the thinking will be protection.”