The Welfare Reform Bill's stormy progress has raised a number of issues about the financial conseque...
The Welfare Reform Bill's stormy progress has raised a number of issues about the financial consequences of long-term illness and disability. Annie Dorrington considers how the industry should respond
When it comes to welfare reform, political passions run high, In May, the Government suffered its greatest setback yet when 80 or so backbenchers rebelled against the proposed means testing of incapacity benefit. The proposals were also attacked by a number of charities, who resigned from the Government's Disability Benefits Forum in protest.
The rebels are particularly critical of the move to reduce benefits for those who receive £50 or more a week from an occupational pension. They argue that this will penalise those who have made provision for their retirement and will discourage others from doing so in the future.
Benefit cuts
The rebels also object to limiting incapacity benefit to claimants who have paid National Insurance contributions (NICs) in the last two years. Claimants who had not paid sufficient NICs would receive income support at a lower level instead.
Critics point out that if this rule was applied today it would disqualify 170,000 current claimants and result in a saving of £700m a year. They also claim that disabled people who are already receiving incapacity benefit may see this as a disincentive to returning to full-time work for fear of falling ill before having paid their two years worth of contributions. In such cases, they could be classed as a new claimant and could, therefore, be denied incapacity benefits.
Like a pebble dropped in a pond, the furore surrounding the bill has created waves in the media. First, it has placed the issue of benefit levels and eligibility firmly back on the agenda. Second, it has raised specific questions about returning to work after an illness or disability and about coping with retirement alter a prolonged period of unemployment.
New challenges and opportunities
These present new challenges and opportunities in the protection market. Obviously, any public discussion of State benefits enables IFAs and insurers to promote income protection policies. The industry has an important role to play in educating the public and employers about the need for individual and group cover. Many insurers can provide IFAs with sales material on benefit levels, eligibility testing (the all works test) and the statistical likelihood of suffering a long-term illness. Such information can be a powerful weapon in the IFAs sales armoury.
However, IFAs should also help their clients look beyond the immediate need. It is all very well having a policy that pays a proportion of the client's salary when they cannot work, but what happens when they want to return to their full salary?
One of the objectives of welfare reform is to ensure that incapacity benefit is not open to abuse by those who do not want to return to work, but find it more lucrative than unemployment benefit. While the extent of abuse in the public sector is open to debate, I would argue that it is not the general experience of the private sector. Even when claimants are receiving relatively high levels of income from their income protection policies, many are eager to return to work as soon as possible. Money, after all, is not the only thing that affects quality of life - long-term claimants often experience feelings of isolation and miss the companionship and sense of purpose that work brings.
The return to work
Unfortunately, it is not always easy to return to work. A recent report in The Guardian newspaper claimed that "people with disabilities are twice as likely to be unemployed as other people. Of the five million people with disabilities of working age, 41% participate in the labour market, compared with 84% for the rest of the population."
Some people find that they are no longer physically able to do their old job. Others may find that a long absence from work has dented their confidence and they may need retraining to update their skills and knowledge, This is where insurers can help. Some now offer optional vocational programmes as part of their claims management service. These programmes can help clients identify new opportunities that match their experience, qualifications, and interests.
Retraining and support
The level of support can vary from helping with the basics like CV preparation and interview technique to funding a retraining course. Vocational programmes have proved so successful, that the Government is now working with a number of insurers to see if similar services could be introduced into the public sector.
For individual sales, such programmes help add value, but it is in the group market that they really come into their own. Recent legislation, such as the Disability Discrimination Act, has placed greater responsibility on employers to provide opportunities for all staff. If an insurer can meet the cost of helping an employee return to work or retrain for a new position, so much the better.
Long-term claimants
So far we have looked at how income protection policies can help clients cope with disability in the short and medium term by ensuring a regular benefit and helping them return to work. But what about long-term claimants, particularly those who are still claiming when they reach retirement? Income protection policies are usually set up to run to retirement age, as policyholders anticipate their pension will kick in at this point.
The problem here is that claimants who have been absent from work for a long period may well have missed out
on vital pension contributions. And, if implemented, the proposal to restrict benefits to pension holders will cause further financial problems for this group.
Retirement protection
One potential solution to this problem is taking out retirement protection benefit with an income protection policy. This pays the client a tax-free lump sum at the end of the plan if they have been unable to work for a long time and can provide a useful nest-egg in retirement, Alternatively, group income protection policies and some individual employee contracts can be set up to cover National Insurance and pension contributions to ensure claimants do not lose out.
To conclude, welfare reform has far-reaching consequences for everyone. IFAs have to encourage clients to take a long-term view. It is no longer enough just to ask 'how would you cope if you could not work?' Now we all have to think about how we would get back to work after an illness or injury and how we would manage in retirement if we had been unable to work for a long time, Just like a previous minister, when it comes to our future welfare, we too should be 'thinking the unthinkable'.
Annie Dorrington is protection marketing executive at Zurich IFA Group
