How can you help younger clients understand the value of income protection? Roger Edwards shares some tips
Income protection (IP) might not be a purchase that often crosses the minds of young, busy and career-minded couples. They may still be enjoying a hectic social life, building a home and fulfiling career ambitions or adjusting to the arrival of their first child. All of these things are all much more exciting, and feel much more important than the dull subject of protection.
Trigger points
Young people are unlikely to read about protection in the pages of best-selling lifestyle magazines, even those targeted at first-time parents. And it never gets talked about on TV. It is probably completely absent from conversation with friends - where the next holiday destination will be, and which is the best brand of nappies are all subjects much more likely to get discussed.
Much of the marketing that surrounds protection products still deals with traditional trigger points such as marriage, buying a house and having children. And more often than not the message is built upon the need to provide financial assistance for families following the death of the 'breadwinner'. In the past this was fine. The family lifecycle followed a fairly predictable pattern. People got married early and they lasted. The man was the main income earner and the woman stayed at home and brought up the children.
Today things are a lot different. People stay single longer and get married later. One in three marriages end in divorce. Couples now wait much longer before having children, if at all. Families often rely on double incomes and women are much more likely to return to work after having children. Relying on the traditional trigger points may mean that people remain unprotected.
The protection needs of people whose lifestyles are based on good salaries are obvious - especially those people who could not survive financially on just one income. They will probably have a mortgage to service, a household to run and all the expenses associated with raising children. And that's even before they start factoring in luxuries like holidays.
Under-bought
When asked, consumers usually say IP should be top priority as they know that even the most enlightened of employers is unlikely to offer indefinite support if an individual becomes long-term sick. Income becomes much more important to people when they start to talk about their lifestyles, their mortgages, where they like to go on holiday and what they buy their children.
They can see the importance because they realise that income is the foundation of everything that they do in life. And they can see the problems they would face if the income stopped.
But while most people would usually name IP as the most important form of protection for those with no dependents, it remains worryingly under-bought, especially when a good income is the foundation for almost everything these days.
This will always be a difficult area to spark interest, but for those on good money a useful point of comparison is always the very low and basic level of support that is available from the State. What would they prefer - a monthly benefit comparable to their salary or subsistence benefits from the State?
So what should a young family thinking about IP take into consideration? A good place to start is to look at the following questions:
• If they are employed, what arrangements has their employer made if they become long-term sick? Some employers only provide Statutory Sick Pay - which is not a huge amount. Others are more generous but most would only pay for a limited period of time. If they are self-employed then their income may stop as soon as they stop working.
• Are they aware how low State benefits are? The myth that the State will provide still prevails, although more people are becoming aware that State benefits would not allow most people to continue to live in the way that they are used to. The annual amount of State Incapacity Benefit is in the region of £3,000 per year. Could any of your clients afford a pay cut from what they currently earn to this?
• Would they get an early retirement pension? Even if the answer were yes, it would be much lower than if they had been able to work until normal retirement age.
• Could they rely on their savings and investments? How much have your clients saved? This could support their lifestyles for a while but the main reason most people save is to provide for a secure future, or to fulfil a lifetime ambition. And once their savings have gone, what then?
• If one of the couple is a houseperson and is not earning an income, how much would it cost to hire a nanny or a home help if he or she became ill and couldn't run the household anymore? The cost of hiring a nanny or a home help could be as high as £20,000 per year, so it makes sense to ensure that even housepersons are covered. Most insurers will offer reasonable amounts of IP cover for housepersons.
Just answering these simple questions highlights how important IP is. Cover can be quite reasonably priced. For a couple who are 30 next birthday, £15,000 cover for each of them could cost under £35 per month, assuming an 'own occupation' definition and a 26-week deferred period.
Reasonably priced
While many people might balk at that premium, it is worth thinking about what it is buying and how valuable that is. These days £35 wouldn't buy a meal out for two, or a couple of rounds of drinks. But it could mean that they would be able to continue to buy the essentials if they became sick and couldn't work.
However, it still remains hugely undersold. One of the reasons given by IFAs, is that unlike critical illness, which pays a known lump sum benefit, you don't know what you will get from an IP product until you claim. That is, you may recommend a client take out £20,000 per year of IP benefit, but they get a lower payout because their salary changed, or the company may deduct State benefits from the payout.
It is quite easy to avoid this problem. Simply make sure you know each provider's approach to the following:
• What is the maximum percentage of my client's income that it will cover? The answer will usually range from 50% to 65%.
• Does it deduct State benefits from the payout? If the answer is yes, then you need to make sure that your client doesn't over insure and pays for cover he can't get.
• Does it deduct other income protection, including ill health retirement, payments from the payout? If the answer is yes, then you need to make sure that your client doesn't over insure and pays for cover he can't get.
• Does it deduct wavier of premium benefits from the payout? This is a very important question to ask because some companies will deduct waiver of premium benefits from IP payments, even though they do not directly augment your client's income.
Once you and your client are clear what amount is covered, then you could simply send them a quick letter each year to confirm that their salary still fits with the income multiple the provider uses. If there has been a change then this would give you an opportunity to review the cover up or down. This could actually form the basis of an annual protection review for your clients and may lead to other advice opportunities.
Roger Edwards is products director at Bright Grey
COVER notes
• Advisers need to realise that traditional triggers for buying IP, such as marriage and having children, are no longer relevant to many clients.
• Ask clients direct questions about how they would continue to afford their lifestyle if their income disappeared.
• Make sure clients understand.what benefits the State provides and compare this to their current income.
