Many thought it would never happen. A few lost heart altogether. But in 1997 the prophecy came true – insurers actually made money from income protection insurance. In truth, they have for some years. But recent sales figures have increased to such an extent that income protection is now becoming lucrative. The number of policies sold has grown rapidly as people become more aware of the need to secure an income in case of illness or accident. The welfare state is no longer the safety net it once was.
Figures from the Association of British Insurers show 117,000 new individual income protection policies were sold in 1995. This figure grew to 150,000 new policies in 1997. Premium sales on these products grew from £52m to £72m over the same period.
The biggest players in the income protection market include Black Horse Life, which alone sold over 15,700 policies in 1996, Allied Dunbar (12,373 policies in 1996) and others including the Norwich Union, Friends Provident, Zurich, Permanent and UNUM. Methods of sale may vary. For example, Black Horse and Norwich Union sell policies direct, while Permanent and UNUM use intermediaries – but it is big business for all.
Ian Grimsell, product marketing manager at friendly society Tunbridge Wells Equitable, believes the sales figures reflect the overall changes in the job market.
“The 1990s recession hardened the income protection rates and more and more people in employment realised that the state benefits would be more difficult to claim,” he says.
Changes to the state benefit system in April 1995 included the replacement of sickness benefit with incapacity benefit, again making the Government appear less reliable in times of need.
“Incapacity benefit is less generous than sickness benefit – if that was ever generous – it is taxable and it is harder to get,” says Nick Lomas, marketing manager at UNUM. “This was obviously the central signal to people that if they wanted a reasonable standard of living, the state was not the one to rely on.”
While benefits became less attractive, income protection policies were revamped. Before 1996 any payments of claims on income protection policies were taxable, but this was changed to make the income protection option more credible to people who were ready to take responsibility for their own income security.
“The payments for an income policy became tax free in 1996 because the safety net from the state had been reduced and the Government decided it should not penalise people who take cover out,” says Lomas. Sales have grown since then and the opportunities for intermediaries are increasing.
Most insurers believe income protection goes hand in hand with critical illness cover and that intermediaries, brokers and IFAs, should aim their strategy at people getting this type of insurance.
“Income protection is something that doesn’t sound glamorous and sexy, but it is probably needed more than critical illness cover, because if you have an accident you may need cover until you are 65,” says Avenda Burnell Walsh, corporate communications manager at Permanent.
“I think there are opportunities, particularly for those brokers who already have investment clients. They should make sure that their high net worth clients are protected with a continued income and make sure they are fully clued up,” she comments.
Other insurers feel there is fruit ripe for the picking if intermediaries target a particular group of people taking out insurance. “Brokers are facing competition from direct sellers,” says Simon Barwell, personal finance marketing manager at Swiss Life. “But they should select their clients accordingly. Direct sales forces offer access to clients more quickly and sell off-the-shelf products that are not tailored to clients, but IFAs can tailor their products and give clients good value for money.”
Grimsell believes intermediaries may already have access to potential clients. These may be people they already advise on money matters or have sold other insurance policies to in the past.
Also, if someone is taking out a mortgage, Grimsell believes intermediaries should take the initiative to educate them on the importance of protecting their income so that mortgage payments are not jeopardised by sickness.
Intermediaries have also been targeting specific sectors of the population that may have special requirements, such as the self-employed.
“Women in employment too are more likely to be off with long term sickness and more likely to claim,” says Grimsell. “There is also the issue of housewives’ cover. If your wife is ill and you work, who is going to take the kids to school? This sounds chauvinistic but it is practical. A lot of working men would be totally snookered unless they have someone to come in and help out,” he adds.
Glen Smith, director at health intermediaries, HealthCare Partners, believes IFAs are in a better position than income protection specialists to sell policies.
“This is because IFAs can explore all the weak areas of a client’s cover by carrying out an interview. Income protection specialists, on the other hand, are non-regulated and are not in a position to look at client income, expenditure and other areas where the individual may be under or over insured.
“People come to us to talk about health benefits and we can talk to them about what they can do if they are ill. They think they can go to hospital and be treated, they don’t realise that their stay in hospital could be the precursor to a long illness,” comments Smith.
“Most people don’t want to look at the glum side of life. They don’t consider how long their sick pay will last, so we have to help them along these lines by giving them `what if?’ scenarios,” he adds.
Prestige, an East Sussex-based intermediary, is another company which has experienced an increase in sales of individual income protection. Prestige’s director, Malcolm Brooks, believes this is because of greater awareness of the need for protection.
“Under the Financial Services Act 1995 and laws surrounding disclosure, it is part of our remit to point out that all the other provisions are coming from expendable income,” says Brooks.
Brooks also feels the entrance to the market is wide open to intermediaries: “There are enormous opportunities because it should be one of the main policies that people buy. We use six IFAs under the umbrella of Prestige and in this way we make every client, whether existing or new, aware that they should protect their income.”
There are very few reasons why people cannot afford income protection, because the market is so competitive and the cost and benefits vary depending on the insurer. For example, BUPA, the private healthcare specialist, offers an income protection policy at a lower premium because it only covers people in the event of injury or illness for a period of two years.
Cornhill Insurance also offers a mixed bag package of health insurance and income protection policies.
Using intermediaries may help people find the best deal to suit them, whereas a direct policy will not necessarily be tailored to their needs.
“People are not aware that small intermediaries can protect them far more cheaply than the main market. For instance, there are straightforward premiums where you don’t get money back, even if you don’t make a claim. Then there are premiums with shared profits where you pay for protection and even if you make a claim you will then get a capital element back,” states Brooks.
View to a kill
With such a wide range of options available, there is no reason why intermediaries should not make a killing. But some insurers believe IFAs don’t do enough to make all their clients aware of income protection.
“People tend to assume it won’t happen to them, so they would rather invest any money they have,” says Burnell Walsh. “Some financial advisers help them to do this investment when perhaps they should be suggesting income protection.”
Burnell Walsh also believes brokers do not often develop their knowledge of this area enough and are unable to point out the potentially huge expense sick or injured people have to incur before they are able to get back to work – or worse. She gives the example of a 23-year-old who has had an accident that means they cannot work again. If they had just £200 a week benefit on a claim that they had only paid into for a couple of years, the total pay out at a 5% inflation rate until they were 60 would be around £1,056,933.
The long-predicted growth in the income protection market has taken some time to occur, but now it is here brokers, insurers and IFAs should make the most of it. While insurers on the whole are confident that the growth will continue, there are many untapped groups that income protection would benefit.
“I am delighted the tide has turned. We always knew it would – but we were starting to lose faith,” admits Burnell Walsh.