Underpinning everything else ...
Kevin Carr, chief executive of Protection Review, runs through a list of the 10 things financial advisers should think about when recommending income protection to clients
We have recently seen the launch of a much needed industry charity-led campaign to raise awareness of income protection among consumers. As its name implies, the Seven Families campaign supports seven families across the UK who have lost their main source of income without having any financial support protection in place.
Having seen the stories of the families who, through accident or sudden disability, have had their lives changed forever, it highlights the ever-greater importance of advising on protection – and particularly income protection – as the part of financial planning that underpins everything else. Here we suggest 10 things to think about when recommending income protection to clients.
"One of the most crucial aspects of income protection is making sure your client understands which occupation class they are being covered under."
* Thoroughly investigate employee benefits
When talking to a client about the need for income protection it is a rare occurrence that they know what they are already entitled to. Recent research from income protection specialist Drewberry found 26% of people do not have income protection because they believe their sick pay would be sufficient to look after them – yet, in reality only 14% would receive sick pay for more than six months while 24% would receive no sick pay at all.
It is impossible to make recommendations on income protection without first knowing a client’s sick pay benefits and whether there is a group income protection policy in place. “Most clients overestimate the benevolence of their employer and rarely have exact details of their benefits to hand,” says Peter Chadborn, director of advisory firm Plan Money. “In all cases, prior to any recommendations being made the employer handbook should be inspected by the adviser.”
* Prove claims are paid
Claims statistics have been a useful tool for many years to help combat negative perceptions that claims are not paid. While it has become commonplace for figures to be released for critical illness cover, most income protection providers now publish their stats too. In the first move to release long-term claim statistics, the insurer British Friendly recently revealed that over the past five years it has paid 96% of income protection claims on average.
“It is about the bigger picture of consumer confidence,” says British Friendly chief executive Mark Myers. “If claims are at the heart of our culture, you are proud about them and want to shout about them. The industry should be publishing its claims numbers much quicker and much louder to get the best outcomes for our joint customers.”
Adds Tom Conner, a director at Drewberry Insurance: “It is important as an adviser to know that when an insurer receives protection business it will follow through on its promises. Long-term paid claim statistics are a useful tool to demonstrate that income protection policies consistently pay out, and that insurers are not trying to decline every claim, which is how the public often perceives them.”
* Occupation class, occupation class, occupation class
One of the most crucial aspects of income protection, and a point that can never be made too often, is making sure your client understands which occupation class they are being covered under. ‘Own occupation’ income protection policies are by far the most comprehensive and easy to claim on. They effectively cover you for being unable to do your own job. Often people can mistake inferior cover offering a cheaper premium as like-for-like cover with an own occupation policy.
Other types of occupation classes include ‘any occupation’ (where you have to be unable to do any job to claim) and ‘activities of daily work/living’ (where you have to be unable to perform a number of tasks from a set list). This point is so important that intermediary LifeSearch has announced it is committed to never recommending an income protection policy to its customers that does not offer ‘own occupation’ cover. Friendly societies in particular often only sell policies on an ‘own occupation’ basis, and many insurers are moving to this position.
* Is critical illness cover better for cancer?
Cancer is arguably the disease people worry about the most. The financial risk associated with having cancer is most often addressed through the recommendation of critical illness cover. However, while critical illness cover offers a lump-sum payment to help ease the financial burden of such illnesses, people can be left unable to work for many years.
Macmillan Cancer Support figures show that four in five people are on average £570 a month worse off than before they were diagnosed with cancer. This shows there is real benefit in weighing up whether an income protection policy could be more appropriate for some clients in addressing the financial impact of cancer.
* Age is just a number
Young people often feel that being seriously ill is something that either will not happen to them or is something to worry about later in life. But long-term illness can strike at any age and making sure an income is protected can be as important at the age of 20 as it is at 60. Figures from protection intermediary LifeSearch show that in 2014 there was a 48-year age gap between its youngest (23) and oldest (71) income protection claimants.
The average age when a claim was made was 43 – a time when people often have the highest financial responsibility in terms of property and dependant family. These figures show it is rarely too early to consider protecting an adult’s income. And of course, the younger people take out income protection, the cheaper it is over the course of the policy – even compared with someone older having cover over fewer years.
* Set underwriting expectations at the outset
One of the biggest reasons clients may not go through with an income protection application is when an insurer needs to raise the quoted premium due to a health or lifestyle factor and the client was not expecting it. Income protection premiums are heavily influenced by medical history, risky pastimes and occupational activities – for example, working at heights – so it makes sense to obtain top-line information on all of these factors ahead of your research.
If this information is factored into the initial dialogue with insurers’ underwriting teams, it ensures your recommendations are as close as possible to the post-underwriting outcome. “In my experience, this ensures a greater take-up of income protection policies, because it reduces the likelihood of the client being turned off by counter-terms they were not expecting,” observes Plan Money’s Chadborn.
* Consider short-term options
While income protection policies offer relatively cheap premiums – particularly for those who are young and in good health – a comprehensive long-term income protection product is not going to be within every client’s budget, when you factor in their occupation, health or lifestyle. So what is the next best thing? There are some great short-term income protection products on the market, the best being those that exactly resemble long-term income protection – the only difference being the number of years it will pay out for.
Short-term policies typically pay out for one or two years, and can be insured on an ‘own occupation’ basis. This is an option worth exploring if clients would otherwise be left without any financial protection if they were unable to work – having short-term cover is better than having no income protection at all.
* The importance of indexation
Adding indexation to an income protection policy is something that can often be overlooked. Unless prompted to by an adviser, protection insurance is not something that people regularly revisit, like they have to annually with car or home insurance. So an income protection policy is likely to remain the same for the term of the policy.
During this time the cost of living will increase and, unless indexed, any pay out will not keep pace. People can find, if they need to make a claim, that they do not have quite the safety net they thought they did. Income protection policies can be set up to track the Retail Prices Index or increase by a set percentage each year, to ensure they will always be as valuable to the client as on the day they were taken out.
* Set appropriate waiting periods
The length of time a client can wait before an income protection payment kicks in can make a big difference to the cost of the premium. So it is worth investigating thoroughly how long people could survive financially on employee benefits and any savings they would be happy to use, before any income protection payment is needed and to ensure they are not over-insured.
The cost difference for a non-smoking 40 year old, on £1,000 per month benefit with an income protection policy deferred for one month and 12 months is more than £20 a month. The average deferment period is around three to six months.
* Consider different markets
Traditionally, protection sales have been focused on those that own their own home, but industry figures show that a fifth of the 22 million households in England live in rental properties. Renting is also no longer the preserve of university students and fresh-faced graduates, with a rise in the number of professionals with families living in rented accommodation.
Research from insurer LV= shows that, on average, renters pay 58% more than homeowners to keep a roof over their head, which could leave them at greater financial risk if they were to lose their income. One could also argue that landlords would be less likely to offer a stay of execution than a bank if someone falls into arrears, thereby making renters a group with a very urgent need for income protection.
Kevin Carr is chief executive of Protection Review and managing director of Carr Consulting and Communications