Considering income protection in the context of state benefits is not a one-size‑fits-all affair. Steve Payne investigates.
State benefits are complex: very complex. Their assessment takes into account a large number of factors, not only about the individual but also about their family.
Income protection is relatively simple. Pay a premium every month and then, if you are ill or injured and unable to work, you receive a percentage of your salary.
A YouGov poll of more than 10,000 people carried out on behalf of Friends Life found that only about 3% of people have an IP policy. Why such poor take-up? Surely the certainty of an IP plan should be the prime driver in any buying decision?
I’m willing to hazard a guess that the majority of the UK’s population are unaware of how IP works, especially alongside state benefits, and that even the most experienced financial adviser might struggle to know what the best financial options would be for their client.
Some clients who choose to take out IP will not be aware of the impact of state benefits. Entitlement to such benefits varies significantly due to personal circumstances. The more regular and substantive benefits are means tested, which could result in income from an IP plan reducing the amount the client could claim. But should this uncertainty drive choice about IP? Probably not.
This situation can seem a bit unfair, and some might feel that paying premiums for IP won’t work out to be the best deal for them. Essentially, some of the money they have been paying through income tax and national insurance is for the purpose of providing them with some financial assistance should they not be able to work. So why then pay for an IP plan only to lose some of that entitlement to benefits?
It is a case of weighing up the options for each individual, because one size definitely doesn’t fit all when it comes to IP and benefits, and advisers must look at the whole picture. It is not always apparent what the best option for each client will be, and it does take a fair amount of work to find this out.
Perhaps one of the reasons there are a lot of ‘ifs and buts’ is because there are a number of different state benefits all with eligibility criteria, some being means tested, whereas insurance looks only at the individual. There are fundamental difficulties when considering IP and state benefits.
IP considers an individual’s ability to carry out their occupation and the requirement, if understood, to protect their lifestyle, regardless of the number of dependents they have or the amount of savings they have accrued.