Insisting that consumers take more responsibility over their own financial security, David Macgregor explains the straggling take-up of individual IP and how it can edge its way to the front of the pack.
It is an unfortunate and disturbing fact that only a very small proportion of the 37 million UK working population has income protection (IP).
Given that most individuals are dependent on their working income to pay for accommodation and general living expenses, this lack of insurance is pretty concerning.
Those who are often persuaded to buy expensive insurance on their new televisions, credit cards, or washing machines seem, for the most part, to avoid what most people would regard as vital insurance on their income.
There are a number of underlying reasons for this.
Method to the madness
While a great number of IFAs are fully aware of the benefits of IP and treat it as a cornerstone of their clients' financial needs, there are still some who overlook it. Given that individuals are more likely to be off work for six months or more than they are to die or suffer a critical illness before retirement, this clearly demonstrates that there are additional opportunities for IP.
It has to be said that a reason for these not being grasped could be that the IFA may have been put off by past experience of the sector.
They may have found their quotations were subject to considerable upward revision when their clients reach the policy stage. For example, a marketing manager who the IFA considered would fall into a lower-risk group, could, because of their business miles, have ended up in a higher one. This would have led to a premium hike and, in all probability, a customer who failed to sign up to the policy.
The application process can also be fairly lengthy, which is understandable given the amount of risk being shouldered by the provider, but is nonetheless a hindrance to a swift sale.
Alongside IFA attitudes, consumers are frequently reluctant to take out IP because they have a mistaken belief that it is not needed. In most consumer surveys of those not taking out cover, it is usually found that the majority still believe that the state will support them adequately if they are unable to work due to illness or unemployment.
As we know, this is usually not the case over the longer term. A 'state-will-provide' attitude may have been valid to hold 20 years or even a decade ago, but it certainly is not now. Incapacity benefit of £350 a month is nowhere near the level of recompense that the average wage-earner would require if they were suddenly unable to work.
Additionally, consumers often baulk at the monthly premium that is quoted and conclude that it is not for them. They do not consider that a policy could, if they suddenly find that they are unable to work, have to pay them, say £2,000 a month until they are 65 with a total payout of over £750,000.
The above-mentioned factors are the key reasons for the year-on-year decline in UK IP sales since 2002, but some in the industry may point to others. Another contributory factor could well be the recent concerns regarding non-disclosure, particularly in the critical illness market.
The question that has to be asked is 'how can the industry boost IP uptake?'
The answer to this question is partly down to encouraging IFAs to revisit the range of products available and ensure that their clients are aware of IP's potential benefits. They need to start viewing IP as key to their financial planning.
It is not as though IP is not remunerative. On a £40-a-month premium, the initial commission could be around £650 followed by renewal commission (commonly after 36 months) of 2% to 3% of the ongoing premium.
Aside from getting more IFAs motivated to sell IP, providers have a responsibility to ensure that they offer the highest quality cover and that their claims settlement record bears scrutiny.
Wider publication of claims settlement figures from the various IP providers could be an effective way of demonstrating to IFAs where they should channel their business if they want the best cover for their clients.
It is still the case that some providers fail to meet claims that many would consider valid. A recent case involving a landscape gardener who had broken his arm and could not use garden tools, push a wheelbarrow or do anything that required the use of both arms, concluded, rightly, that he could not do his job.
However, because he was able to perform basic 'activities of daily living', such as walking, climbing the stairs and washing himself, he did not qualify for any benefit.
He was unable to work at his job but he failed to obtain payment from his IP provider. IFAs will need to, therefore, be aware of the various terms, conditions and definitions within IP policies with one of the most important being the definition of incapacity.
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 comes 'any occupation', where the claimant could be expected to carry out any other occupation, followed by 'activities for daily living' and 'activities of daily work'.
Some IP providers have tended to move towards the bottom end of this range of cover when, for example, they consider manual workers. In other words, if a potential policyholder is a construction worker they would be lucky to get 'own occupation' or 'suited occupation' definitions of incapacity.
Premium loading is another area where providers should help IFAs and their clients by introducing less complication and more clarity.
Most providers start with a base standard premium for a white-collar occupation such as an accountant or civil servant who would be termed Class one. For Class two, for example, a shop assistant, the premium loading is likely to rise by 30%. For Class three, for example a carpenter, the premium may be 50% more expensive than that for a Class two individual.
A Class four occupation, such as a scaffolder or a roofer, would warrant a further loading on top of that for Class three. If the policyholder is a woman, they should expect the premium to rise again by around 50% over that for a man. Smokers can also expect a 15% loading.
Add to this complexity of the various deferred benefits options and it is scarcely surprising that relatively few Class four workers have IP in comparison to those working in Class one jobs.
User friendly
By simplifying this process, applicants need not have such a confusing experience of applying for IP. Thankfully, there are providers in the market who have succeeded in doing this.
Such providers are invariably mutual and tend to use The Holloway Contract, which was established in 1880 by Victorian social reformer George Holloway, and which provides the policyholder with an unparalleled level of cover.
To give an example, such as contract has a 'one-rate-fits-all' policy that applies to all work classifications. Whether the policyholder is a smoking female steeplejack, or a non-smoking male accountant, they would benefit from the same premium.
One can opt for day-one IP, so that after just three days off work, payment is backdated to the first day of incapacity.
The definition of incapacity is often 'own occupation'. If they cannot work in your particular occupation, for a variety of reasons, then you will receive benefit from your policy. They will not be expected to work at another job.
On top of this, policyholders with some providers are entitled to a tax-free lump sum at their selected retirement age, irrespective of their individual claims experience.
Providers who are going down the route of policy simplicity, maximum cover for policyholders and maintaining high levels of claims settlement are showing IFAs and their clients how beneficial IP can be.
One-rate-fits-all premiums, own occupation definitions and day-one cover makes the process easy to grasp.
This has to be the way forward for the industry. Only when the market is offered transparent products with benefits that are plain to see can the industry expect to make real sales inroads and tackle the more than 30 million individuals in this country who still have no form of IP. n
David Macgregor is chief executive of Holloway Friendly
