David Macgregor reports on how manual workers often find it hard to obtain good quality income protection
Finding good value income protection (IP) is not easy if you are a manual worker. Some providers charge prohibitively high premiums for cover, while others often refuse to even consider cover in this sector of the market.
This lack of choice means that clients sometimes have to make do with an expensive offering from IP providers or a short-term accident and sickness contract. In addition to being expensive, the IP policies that manual workers are offered often come with quite harsh restrictions on the extent of cover. For example, it is not sufficient for a policyholder to be genuinely suffering from the sort of ill health or injury that most people would consider prevents them from doing their job. Some providers require individuals to undertake 'activities of daily living' or 'activities of daily work' tests.
This can result in individuals who are genuinely unable to perform their job functions, through injury or ill health, failing to obtain benefits from their IP policy.
For example, consider a case involving a landscape gardener who has broken his arm. He can not use garden tools, push a wheelbarrow or do anything that requires the use of both arms and insists, rightly, that he cannot do his job. However, because he is able to perform basic 'activities of daily living', such as walking, climbing the stairs and washing himself, he may not qualify for any benefit. Unfortunately, this kind of case is not unusual. Many IP providers have been steadily reducing the quality of cover they offer manual workers.
Generally speaking, there tends to be four definitions of incapacity in the IP market. 'Own occupation' is the most sought after and means that the policyholder would not be expected to accept employment in a different occupation. This is followed by 'suited occupation' where an IP claimant would be expected to work in a 'suited' occupation, that befits their training, education and experience.
After these two definitions come 'any occupation', where the claimant could be expected to carry out any other occupation, and 'activities for daily living' and 'activities of daily work'.
Top loadings
Many IP providers have tended to move towards the bottom end of this range of cover when considering manual workers. In other words, if you are a building site worker you will be lucky to get 'own occupation' or 'suited occupation' definitions of incapacity. Even then, you can still expect to have your premium loaded if your work is manual. The more manual the job, the higher the loading.
Most providers will start with a base standard premium for a white collar worker, say an accountant or civil servant, who would be termed a class one worker. For a class two worker, for example a shop assistant, the premium loading is likely to rise by 30%. For a class three worker, such as a carpenter, the premium may be 50% more expensive than that for a class two individual.
If you are in the position of being a class four worker, for example a scaffolder or a roofer then there would be yet another loading on top of that for a class three worker. For a woman, expect the premium to rise again by up to 75% over a man, and smokers can expect a 15% loading.
The hurdles do not end with the manual worker being supplied with a quotation. The deferred period offered to them could be longer than they really want. Typically 13 weeks is the shortest offered to these higher risk occupations.
When all this is considered it is apparent why relatively few manual workers have IP in comparison to those working in class one jobs. It is estimated that only 11% of the working population have IP cover and, of these, a disproportionately small number are manual workers.
Frustration
In fairness, it is understandable why IFAs view IP from some providers as an often tricky and frustrating area of business. They complain that when they, in good faith, submit business, they can find that their client is knocked down an occupation class for what must seem like fairly inconsequential reasons. The premium then rises and the client may lose interest in taking out the policy.
It is therefore, little wonder that market growth in this sector is not all that it could be. In 2002, a total of 192,000 new IP contracts were written - about the same number as in 2001, according to figures from the Association of British Insurers. IP is generally, and wrongly, regarded by the industry as the poorer cousin of critical illness cover, which has seen its market share grow substantially in recent years.
Manual workers and IFAs, however, need not have such a poor experience of IP. There are providers that do not penalise higher risk occupations and which offer products that are straightforward and represent value. If you search around, you will find policies that offer the own occupation definition of incapacity. If you cannot work in your particular occupation, for a variety of reasons, then you will receive benefit from your policy. You will not be expected to work at another job.
IP providers working in this sector, and many in the with-profit sector, have first-rate products that offer these features. IFAs should be cautious about directing their manual worker clients into budget-style products that offer less coverage. These tend to be linked to mortgages and have witnessed strong growth in recent years - they increased by 25% in 2001 to 35,168, from 28,066 in 2000. Not only do these often provide less cover, but also nearly all of them have reviewable premiums, whereby the provider can increase the rates at any time, irrespective of an individual's circumstances and previous good claims history.
The lesson for the IFA is that IP can be a straightforward product to sell to manual workers - when there is no confusing detail for the client and when the benefits are obvious. A one-rate-fits-all premium, own occupation definition and short deferred period cover makes the process easy to grasp for the customer.
It should be a priority for intermediaries to ensure that their clients - especially manual worker clients - have IP.
Relying on the State is no longer a realistic option. Long term Incapacity Benefit was set at £70.95 per week by the Government for 2002/03, which represents a meagre 17% of the national average weekly wage of £418.
A Mintel Financial Intelligence report published last year showed that 77% of people believed State benefits on their own would not be able to support them should they ever need to rely on them due to illness or redundancy.
In addition, 80% thought that people should take greater responsibility for self-provision in times of need rather than relying on the State. Recognition of the shortfalls in State benefits should support the marketing of IP, but this has yet to transfer into spending on IP - most notably among manual workers.
There is a great sales opportunity awaiting those financial advisers willing to invest the time and effort in getting their clients the right IP products.
David Macgregor is chief executive of Holloway Friendly Society
COVER notes
• Many IP providers refuse 'own occupation' or 'suited occupation' definitions of incapacity to manual workers, meaning policies are less likely to pay out.
• Those providers that do offer 'own occupation' cover often load premiums by over 50%.
• Good value cover is available for manual workers, but it is unlikely to be found in traditional budget IP plans.
