How's the IP armoury?

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As the economy improves, there is anecdotal evidence some advisers are neglecting income protection. Ian Smart argues the opposite should be the case.

There are certain things we do in life without thinking about them very much. Some of those things are good for us and some aren't so good. It's at this time of year that many people have been making an effort to break out of some of those bad habits.

Things like giving up smoking, eating less and drinking less are fairly common but often people fall back into familiar ways fairly quickly. After all these things are habitual so it's easy to lapse without even realising until it's too late. What is more difficult is to form the new habits that replace the old ones that weren't good for us.

Unfortunately the same is true for protection. The UK public have, in general, never formed a habit of taking out protection as the cornerstone of financial planning. Consequently it's not something that most people do as a matter of course.

To change this we need to make buying protection a habit, the norm, something people do without thinking. But the buying public won't do this unless those they seek advice from make a habit of talking about it to them.

Often it is only considered when taking advice on another financial decision such as taking out a mortgage. And even then it is more often than not a secondary consideration and something that can be done later when they have more time to think about it.

But once the mortgage is arranged and the new home moved into, it's only human nature that other things become more important and the need for protection is put on the back burner to be done another day. And it is not just clients that are deciding to delay the purchase.

I have had several conversations recently with advisers who have said that following the upturn in the housing market they are too busy arranging mortgages to spend time arranging protection for clients.

They either won't mention it at all or will decide they'll come back to it at some point in the future. But this approach isn't going to instil any urgency from the client if they ever do revisit the subject.

If it wasn't important enough when taking out the mortgage last year, why would the client think it would be important now? It is important to strike whilst the iron is hot and while there's a clear focus. The problem is that by not doing it straight away it often never gets done.

Some advisers are therefore missing the easiest of opportunities to start building for their client the habit of having protection in place. And with the number of first time buyers, who are the least likely to have any form of protection already, increasing significantly, the opportunity hasn't been so good for many years.

But far too many families that have struggled to get on the housing ladder now run the risk of getting into financial difficulties when illness or death strikes unexpectedly, which could so easily be avoided with appropriate protection.

Habit forming

We have to make sure that the new habits are good for us and aren't storing up another problem for us further down the line. Giving up smoking is a good thing, but if you replace the habit of having a cigarette with eating more, making you put on weight, you won't get the full health benefit of your change in lifestyle. In terms of protection that would be like selling life cover to everyone.

They've got some cover, which is good to a degree, but not necessarily the right cover. So it's not just the big illnesses like cancer, heart attack and stroke that we need to point out the risks of. Many people, especially first time buyers, stretch their finances almost to breaking point when buying a home and initially have very little if anything in the way of savings left to fall back on should illness strike.

A few months off work with a badly broken leg or bad back, perhaps on a reduced income, can see people quickly falling into arrears. It's at times like this that much undersold products such as income protection really come into their own.

Income protection addresses a risk that almost everyone is more likely to have to face during their working life, than they are to suffer a critical illness or die, yet is one of the least sold products. As the most likely risk to materialise it really should be the first that is protected against.

Yet the habit that many advisers have when they do mention protection in connection with a mortgage is to talk about the need to make sure the mortgage is paid off if you die or suffer a critical illness.

Consequently the cover the public habitually buy when taking out a mortgage is life and critical illness cover.

Comparatively few people would receive a recommendation for and therefore buy income protection - partly because they don't know it is available, but also partly because its reputation has been tarnished by similar products which to the untrained eye look the same.

This is particularly so after the scandal caused by inappropriate payment protection insurance sales. What made matters even worse is that the industry added to the confusion by calling two very different products by the same name.

This is a habit that it is imperative to kick and definitely one that should never be allowed to return.

This is not to suggest that income protection should be compulsory. Whether it is appropriate is down to individual circumstances. For example people on a low income with little in the way of savings could just be replacing any state benefit they are entitled to as their income protection will be taken into account in the assessment of means tested benefits.

Although someone on a middle income with a small amount of savings may also be replacing those means tested benefits, they would still be better off with income protection if this would replace a higher proportion of their total income than their state benefits would provide. But those on a higher income, whether they have savings or not, will definitely be better off taking out income protection - because the drop in income they would suffer if relying on the state alone would be the most significant.

High priority

For middle and high income individuals income protection really should be much further up the list of priorities than it currently seems to be. Last year  several new products were launched and existing products changed to offer the preferred own occupation definition of incapacity to more people.

In a bid to make it more affordable there is also a growing trend to offer plans that only pay for a limited period of one or two years rather than throughout the term of the policy.

We have also seen claims statistics being published by most of the main providers for the first time and the ABI is still working on agreeing a consistent standard on how these statistics should be calculated. Once this is done it can only be a good thing and should help advisers change the perception that the general public hold, that most protection plans never pay out.

Providers will continue to innovate on income protection in 2014. They are trying to generate interest in the product by reinvigorating it to fit modern lifestyles. But we need to do more, particularly around the application process to make it as easy as possible for clients and advisers and improve the claims process to avoid any nasty surprises from claims being declined or benefits being reduced unexpectedly.

The buying public will only ever become more interested in income protection, if advisers make a habit of talking about it to clients.  

Ian Smart is head of product development and technical support at Bright Grey

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