How difficult is it for a non-preferred life to obtain income protection? Andy Chapman investigates
As the late, great godfather of soul once sang "this is a man's world" - normally, I would not agree; for one, my wife would kill me, however, in the case of income protection (IP) he could not be more correct. In the industry, however, it is more a case of being a young, non-smoking male in a low-risk occupation's world.
The industry has long since been blowing the "IP for all" trumpet. But, how easy is this to achieve? Within the protection community, it is widely acknowledged that, if you fall into the category of a "preferred life", it is generally straightforward to obtain comprehensive, affordable IP cover. However, it is important that everyone is aware of the major issues that affect this process and what can be done, from both sides of the fence - intermediaries and providers - to ensure this crucial form of cover is as affordable and achievable as possible.
Preferred life
What makes a life "preferred"? Firstly, gender. Men can obtain cheaper IP cover on the majority of policies available in the market. Women, on the other hand, will pay an increase in premiums of anything up to 100%.
At first, this may not appear to be a problem in the traditional household - the "breadwinner's" income can be covered without the need to worry about the excess premiums that would have to be covered if IP was purchased on the basis of a female. However, this rather simplistic view does not take into account a couple of important factors - firstly, society is changing and the number of women who are career-focused is at an all-time high, and it is now common that this is the sole income that needs protecting.
Secondly, it does not take into account the vital role that many women play within the household - if they were unable to do what they do day to day, what would be the affect both financially and on the family unit as a whole? It could be argued that this could often be an equality problem, which is why IP cover for "housepersons" is a crucial point to consider.
Next, there is occupation - an area where it can start to get complicated. Generally, across the market, IP policies are priced according to the perceived risk of the occupation undertaken by the applicant. Occupations are often categorised into four categories - class one being low risk, class four being high risk. Sounds simple enough in theory; however, this categorisation can vary from provider to provider and depends on a number of factors - for example, the extent of manually intensive work required on a day-to-day basis, or even the number of miles driven can affect the class of occupation and therefore premiums.
Imagine the situation - trying to place certain occupations can prove a fact-find in itself, further complicating the sales process. If this all takes place on the back of, for example, a lengthy mortgage consultation, how likely is it that the client will say "I've arranged what I came in for, which is a mortgage - IP can wait." As an industry, we have a responsibility to maximise sales opportunities, which requires as pain-free a sales process as possible, currently this is not necessarily the case.
Now come the two major factors affecting the probability of obtaining affordable, comprehensive IP cover - age and health.
As the consumer gets older, inevitably, the risk of illness or injury increases, therefore, the cost increases. This often presents a problem for those who decide to take out cover later in life when, for example, a change in job, or becoming self-employed dictates that income is no longer covered. Through no fault of their own, it could suddenly prove very expensive to gain comprehensive IP cover. Conversely, this means that young people are often able to get affordable cover, if they are sensible enough to recognise the need.
And finally, health. In a permanent product such as IP, the health of the client is always going to be an issue. Application forms are long and detailed, cases that require further medical information common. This is unavoidable. Risk has to be managed and providers must have a full picture of an applicant's health prior to an underwriting decision.
However, intermediaries have an important role to play in managing the expectations of their clients. Firstly, it is vital that clients understand the importance of disclosing all information - the intermediary has a responsibility to ensure this happens.
Secondly, an open, realistic approach with the client helps manage the process, as the intermediary, which is the expert, has a better idea of when an exclusion or loading is likely to apply, so communication is important.
If, having read the above, advisers can picture a number of clients who would not fall into the category of a "preferred life" - but for whom IP cover is still essential - the picture could begin to look fairly bleak.
However, this is not the whole story; there are a couple of options that could mean it is still possible to achieve high-quality, affordable IP cover.
First, it pays to look further than the "usual suspects". There are a range of providers in the market whose policies are not loaded according to occupation or gender. These are well worth a look and, not only will they make affordable cover possible to achieve, but they also shorten the sales process considerably, leaving advisers to focus on the benefits of the product and ensuring all vital medical information is extracted, rather than having to worry about whether the client drives 25,000 or 30,000 miles a year. The result? More affordable cover for women and those in "blue-collar" occupations - and higher conversion rates.
For older clients, the problem is more difficult to overcome as insurers view age as risk, meaning rates are going to be higher. However, the rate structure of the policy can have an affect on changing the perception of the client. Take a policy with an age on entry basis for instance - premium costs will begin higher, but remain throughout. However, restructure this to an age-attained basis or to a provider for which this option is available, and the immediate saving could change the client's perception of affordability - helping the adviser's chances of a sale. The other positive of this is, theoretically, as income should rise through time, affordability or the percentage of income that premiums require, should not change.
To develop a culture whereby IP becomes a 'must have' rather than a 'nice to have' product for the consumer, ultimately, responsibility lies with the providers as well as the intermediaries.
It comes down to removing barriers to sales, making the process as streamlined and user-friendly as possible and, here, there is some good news. A number of innovative providers have focused their efforts on simplifying IP propositions, both in terms of product design and service - making life easier for both intermediaries and consumers.
Favouritism
Historically, the mortgage market has shunned IP in favour of less comprehensive mortgage payment protection insurance or accident, sickness and unemployment policies, partly a result of over complex products that are anything but saleable. The sale of a mortgage undoubtedly provides a good opportunity for a review of protection arrangements, therefore, providers must ensure they give mortgage brokers the 'tools' to do the job. For example, simple, transparent policies and the support and training to ensure they have the confidence to advise and sell IP.
Now is the time for this sector to grow, with mortgage brokers more than aware of the shortcomings of these products, as highlighted by the recent Office of Fair Trading and Financial Services Authority investigations.
IP has been described as the "Cinderella" of the protection arena, a policy that is generally accepted as crucial, but constantly under-performs - so much so that much of the adviser community has lost faith, believing IP cover is complex and only achievable for those preferred lives.
This is not necessarily the case, although there is work for providers to do, as there are a range of innovative policies in the market that overcome these issues. This is the time for the sector to grow, so expect increased support and training from providers over the coming months, along with improved propositions.
The onus is now on both intermediaries to know their market and the consumer to appreciate the huge risk they are taking by not insuring their income.
Andy Chapman is chief executive of Pioneer Friendly Society
