As the UK turns into a nation of singletons, Iain Mallon explains why advisers need to rethink how they sell protection to address this new market
When customers visit an adviser to seek advice about protection insurance, they are most likely to come away with life cover. Sales for this product far outstrip those of other term protection policies. Around three life policies are sold for every critical illness or income protection (IP) policy sold.
It is easy to see why. Firstly, life policies are a straightforward sale for advisers. Premiums are increasingly cheap and the concept is simple to explain - it pays out if you die. Consumers are also more aware of life cover than other protection products.
But for customers with no dependants, life cover is usually the least significant protection to have. Making sure they are protected during their lifetime is much more important. And for intermediaries that is a huge number of potential customers.
On your todd
Despite the growing number of pensioners in the UK, half of those living alone are of working age with the most recent UK census revealing that nearly one in three households (30%) is made up of only one person.
This is a growing trend among the age group most likely to have mortgage commitments with the Institute for Public Policy Research showing the fastest growth in solo living is among people aged between 25 and 44.
According to the Joseph Rowntree Foundation, this figure has trebled in the last 35 years. In addition the current figure of six-and-a-half million single person households is predicted to increase to nine million by 2021.
The foundation also reveals that working people living on their own are the second highest risk group for poverty - much more than single pensioners and second only to single parents. It claims a major adverse event in the lives of these people could be enough to force them below the poverty line.
This event could be a serious illness, or a condition such as depression or back problems that leaves them unable to work for some time.
Bearing the burden
If a cohabiting customer suffers long-term sickness, their partner's income may go some way to covering mortgage payments and household bills, while a person living alone usually does not have this safety net. Overnight their income could drop to virtually nothing. Statutory sick pay or Incapacity Benefit is just £75.40 a week, rising to £84.50 after a year.
Even the higher level represents a drop in income of 82% for someone on average weekly earnings. And the more a customer earns, the more noticeable the drop would be: someone earning £50,000 a year would experience an 88% drop in earnings.
While some bills such as food and travel may reduce for those living alone, others remain the same. These could include mortgage payments, utility bills, insurance and council tax. This equates to one person having a major responsibility on just one salary.
This means they need to spend more of their income to cover these bills than if they were sharing the cost with someone else. Consequently, they may not have much disposable income to put towards protection insurance.
Therefore, they need to prioritise. The most important for people without dependants is protecting their income. Despite such a strong need for IP cover, Swiss Re's Term & Health Watch 2008 report reveals a worrying drop in sales.
New IP sales declined 14.3% from 2006 to 2007 and Swiss Re estimates the IP gap - the difference between cover in force and the amount needed by the UK population to sustain an income if they become unable to work - to be a staggering £190bn.
This widens every year, with new policies issued dropping from 216,169 in 2003 to 111,780 in 2007. Swiss Re says if nothing is done to halt the decline, IP could disappear from the market altogether. Providers and advisers need to address this to ensure customers are properly protected.
Unsurprisingly, price is one of the barriers to selling more IP. Premiums are much higher than life cover - and rightly so, as a customer is far more likely to have time off work than they are to die.
If a customer cannot afford the premiums to replace their entire income, some money coming in is better than none if they are trying to meet bills while absent from work.
To help the process, advisers can establish what it would cost the client to take out the ideal level of cover. Then they change variables such as the deferred period and the sum covered until the premium reaches a level the customer is happy with. Alternatively, they can enter the premium their client wants to pay and see what amount of cover that would provide.
Part of an adviser's role is to make customers aware of their potential need for IP. It is possible clients may not actively request it from their adviser because they are unaware it exists or do not think they need it. But figures from the Department for Work and Pensions show more than 2.6 million people claim State Incapacity Benefits at any given time. That is a lot of people who thought it would never happen to them.
A useful way advisers can help customers decide if IP is right for them is to examine their current monthly outgoings. This could include mortgage payments, council tax, travel costs, utility bills, clothing, insurance and food. They could then look at how these could be reduced if necessary. For example, travel costs might go down if they were not working and they could cut back on socialising and new clothes but mortgage costs would probably remain the same. The remaining sum is what they would need to find if they lost their income.
If the customer has savings, they could estimate how long these would last if they used them to cover outgoings. This could allow them to take advantage of a longer deferred period before their IP kicks in which significantly reduces premiums. But savings run out at some point and customers need to make sure they are covered when that happens.
Painting a picture
Quoting statistics can help advisers to demonstrate the potential financial crisis that unexpected illness or injury could bring to customers. For example, they may be surprised to learn IP is not just there to help if they contract a disease as more than 40% of claims are for stress-related or psychological reasons.
Advisers could also help customers imagine what it would be like if they suddenly lost their income. Could they rely on someone to help out and, if so, for how long? Would they lose their home, and if so where would they live? What would daily life be like trying to survive on State benefits? And would they be able to concentrate on recovering from their illness if they were forced to return to work sooner out of necessity?
There are many reasons why more people choose to live alone - later marriages, divorce or separation, or lifestyle choice. Whatever the customer's reason for being in a single person household, they are more vulnerable to the ill effects of a lost income.
For advisers, the days of dealing with a traditional family unit are fading. Getting smart about the different protection needs of people living on their own is vital to doing business now and in the future.
- Iain Mallon is director of protection marketing at Axa.
