Can people in high-risk occupations obtain good quality income protection? Johanna Gornitzki investigates the options available
Finding an income protection (IP) product that will suit a client's needs is not an easy task. Once previous medical history has been thoroughly examined, the individual's occupation also has to be taken into account before choosing cover. For an adviser with a client working in a high-risk occupation, the latter could prove to be the biggest hurdle.
Hard-hitting facts
To overcome this challenge, establishing exactly what is defined as a high-risk job is crucial. Traditionally, the answer was usually based on whether someone was a blue-collar or white-collar worker and the conclusion was simple. A builder was high-risk, an office clerk, low-risk. While this still holds true to a large extent, with scaffolders and plumbers considered high-risk and IFAs and librarians classified as low risk, modern lifestyles and changing times have forced the protection industry to look beyond this black and white image.
Just as medical discoveries have changed the shape and form of many insurance products, different ways of living have also made this one-dimensional view somewhat blurry, as Peter Chadborn, IFA at Chadborn, Baker & Kearle, explains.
"The biggest claims used to be for back pain, but it is now stress-related problems and this has effectively changed the view of what is considered a high or low-risk occupation," he says.
Teaching is one example of a profession that has moved from one end of the spectrum to the other. "When income protection was launched twenty years ago, school teachers were considered low-risk, but they have now become high-risk because of the stress factor involved," says Diane Saunders, principal at Diane Saunders Financial Adviser.
Geographical locations and dangerous sports or hobbies also influence whether an occupation is regarded as high-risk. Athletes and people who work in the armed forces usually find it hard to apply for IP, and their best option is to go via a specialist provider that focuses on their particular needs.
One such specialist company is PULSE, which focuses on people who work in hazardous places. "We grant cover for up to a year. However, prices are very sensitive, with rates reviewed daily. Working in Iraq, for example, is pretty expensive. At the moment, if someone going to Iraq wanted to assure a sum of £4,000 they would have to pay about 7% per month, which equates to around £270," says Paul Sandilands, director at PULSE.
On the whole, claims experience tends to determine whether or not a certain occupation is classified as high-risk. This is then reviewed on an ongoing basis. Each insurer has got their own definitions of different occupations, but in general, providers tend to treat the same occupation with the same level of risk, says Chadborn. "It is how they treat the customers afterwards that will differ," he adds.
Before examining the options available to people in high-risk occupations, it is worth looking at some hard-hitting facts. Firstly, it is important to remember that IP is already a product that is hard to sell, with sales refusing to take-off despite providers suggesting the 'Cinderella' product will soon become popular. In fact, recent figures show that out of the UK's 28 million working population, 89% are currently without IP cover.
Secondly, the majority of people opting for IP belong to the so-called low-risk group of workers. Translating this into insurance terms, this group is typically classified as class one while the highest risk group is classified as class four. Nick Homer, product and technical manager at Norwich Union Healthcare, believes that around 60% of those who have IP cover work in class one jobs, while another 20% have class two jobs.
"Only 5% of all the people who have some income protection are classified as having a class four occupation, in other words, a high-risk job," he says.
With this in mind, it is questionable whether it is even possible for someone in a risky occupation to find a good value IP product? Obviously there has to be some drawbacks. "The insurance company offering the product is taking on a higher risk because those applicants with class four occupations are more likely to claim early," says Peter Hamilton, head of protection marketing at Friends Provident. This has led most providers to charge extortionately high premiums for high-risk jobs or even to simply refuse to offer cover.
Moreover, a different definition of incapacity often applies to individuals in high-risk jobs compared with their low-risk counterparts. There are a number of types of incapacity definitions, and although some providers use their own variations, they are more or less the same across the board. The most extensive one, and the generally most sought after, is 'own occupation'. A client with this type of cover only needs to be unable to carry out his or her own job in order to claim. This is followed by 'suited occupation', which means a client has to be unable to do a similar job that would suit his training or experience. After this comes 'any occupation', where a client needs to be unable to carry out any job at all before they can claim.
Other incapacity definitions that are widely used are 'activities of daily living' (ADLs) and 'activities of daily work' (ADWs). 'Functionality ability tests' (FATs), a combination of ADLs and ADWs, is due to be reviewed by the Association of British Insurers (ABI) and is likely to be added to the list shortly.
Generally speaking, with the exception of a few providers such as Pioneer, Holloway and Cirencester, insurers tend not to offer high-risk workers 'own occupation' cover.
Significant saving
As a result, this could mean that individuals who genuinely cannot perform their job may still not be eligible for a pay out. For example, take the case of a window cleaner who suddenly developed a fear of heights (acrophobia). He would no longer be able to fully perform his job, however, while his phobia would prevent him from doing parts of his job, he may still be able to work as normal at ground level and may, therefore, not qualify for any benefit.
In some cases, an individual who is unable to do anything remotely similar to what he used to be doing may still be declined. This may soon change, however, after a recent Ombudsman's ruling suggested that 'any occupation' should be interpreted as 'any relevant occupation', in other words, any occupation for which the complainant is suited by reason of their education, training, experience, and social standing.
Further exacerbating the situation, premiums for people in high-risk occupations are likely to be loaded. And the higher the risk, the higher the premium. For example, a non-smoking male, age 30, who wants £10,000 cover per year with a 13-week deferment period would have to pay £44.40 per month to Norwich Union Healthcare if he was classified as a class four worker. The same man in a class one occupation would have to pay £14.83 for the same amount of cover.
Premiums can, however, be reduced by choosing a longer deferment period. Take the example mentioned previously. If the man classified as a high-risk worker, a lorry driver for example, opted for a 52-week deferment period instead of a 13-week period, it would make his premium 35% cheaper.
If this is not viable, budget plans or short-term cover such as accident, sickness and unemployment cover, could also be an alternative as they usually offer generic pricing. But this is hardly a preferred option. "Overall it is usually better to opt for a loading as exclusions can make people misunderstand what they are covered for," says Homer.
"An alternative for a high-risk individual is, of course, to opt for accident, sickness and unemployment cover and then add an income protection product with a 52-week deferment period to get a more long-term cover. This will give a significant saving," he adds.
All things considered, while the process of attaining cover may seem like a struggle, this also shows that it is, after all, possible for people in high-risk occupations to find suitable protection cover.
This is good news for intermediaries. Because not only does this group of individuals provide further business opportunities, it also supplies advisers with another tool to show why specialist advice is absolutely crucial.
COVER notes
• Teaching is one example of a profession that has moved from low-risk to a high-risk occupation category.
• Geographical locations and dangerous sports or hobbies also influence whether an occupation is regarded as high-risk.
• On the whole, claims experience tends to determine whether or not a certain occupation is classified as high-risk.
