No need to recommend CIC over IP or vice versa: use both for proper protection, writes Justin Taurog
We all know that critical illness cover (CIC) sales are far higher than income protection (IP) sales, outstripping them by nearly five to one. Although it is seen as the poor relation to CIC, there are many reasons why IP may be a more suitable recommendation for your clients, and offers them a more comprehensive solution.
In this article, we look at some of the main reasons as to why IP is overlooked, and some of the ways to overcome the misconceptions about IP.
IP is too expensive
By far the most common objection to IP is that it’s too expensive. The cost effectiveness of IP against CIC is difficult to gauge, because the payout for CIC is fixed, whereas for IP it is highly subjective.
The level of payout for an IP policy depends length of time it pays out for, but this could far outstrip a CIC policy if a claimant is unable to return to work, and provides greater peace of mind that bills are covered.
It is fair to say that the cost of IP is over-estimated. For example, for a 35-year-old with a 30-year policy term and monthly benefit amount of £1,500 will pay about £31.93 per month.
If the same client took out £100,000 of life and serious illness cover over a 30-year term, they would pay nearly 20% more at £39.62.
It takes too long to underwrite
Because the underwriting process for IP takes longer than for CIC, there is a perception that it is a more difficult sale. The reason behind the increased underwriting processing time is that the scope of conditions covered by the two products is very different.
With CIC, the conditions your clients are covered for are well defined and known upfront. However, with IP, your clients can claim for any condition that prevents them from working for a prolonged period of time.
Although the underwriting process is longer, the spectrum of conditions your client is covered for with IP is far broader than with CIC, increasing the likelihood of a payout.
Clients prefer a lump sum payout to a monthly benefit
The perception that most advisers have is that their clients would prefer to receive a one-off, lump-sum payment than a regular monthly income at a lower level.
But just because the upfront payout is larger with CIC, it doesn’t necessarily make it the best solution. For example, a client with CIC may suffer a stroke or heart attack, receive their lump sum payout and return to work soon after, having had this ‘windfall’.
However, there is no guarantee that your client will not experience a recurrence of their condition, which they would have no cover for. So the fact that IP pays your clients a regular benefit to cover their salary, means they can return to work when it’s right for them.
Also, several products on the market will pay towards the cost of treating your client’s condition, helping them to recover and get back to work sooner.
My client's employer will pay their salary if they're off on long-term sickness
A popular misconception around IP is that it’s not needed, because clients often believe their employee will pay their salary for the whole time they are unable to work. Many of these clients, when asked, won’t know what their exact entitlement is.
The reality is that only 14% would receive sick pay for more than six months, and only 3% for more than a year.
When you consider that one-fifth of all people on incapacity benefits have been off work for more than five years, there is clearly a shortfall in the expectation versus the reality.
From a legal point of view, an employer does not have to pay any sick pay at all above the rate of Statutory Sick Pay, which is currently £88.45 per week.
My client can claim state benefits if they can’t work
Although they do help, state benefits are often not high enough to protect your client’s income, and with recent welfare reforms, living on state benefits is only going to become more difficult.
In fact, the average family would need to cut their household expenditure by 48% to survive on Employment and Support Allowance.