Piece by piece

The PUBLIC's top six fears are poverty, criticism, ill health, lost love, old age and death. While advisers cannot help with criticism or lost love, they can help clients cope financially with the remaining four. When it comes to the financial services consumer, their two biggest fears are losing their homes and losing their jobs. So, where can advisers help reduce some of the fear and anxiety for their clients?

Every day advisers discuss the short and long-term protection and investment strategies that help reduce the impact of specific events such as death, critical illness (CI) or long-term sickness while planning for a suitable income in retirement and savings along the way. An income protection (IP) policy is a foundation block of any long-term financial plan. Clients, however, do not always see it that way.

In terms of number of sales we have seen a steady growth up to 1999 and then a slight reduction during 2000. Budget IP sales rose to about 28,000 policies and these are mainly associated with mortgage-related sales. It has been suggested that there are between about 1.26 million and 1.7 million individual income protection policies in force at the end of 2000. The group market is about £82m new business premium and an estimated 1.67 million individuals are covered under group IP contracts. The IFA share has steadily increased during the past couple of years.

Why are advisers seeing such an increased success? IP is being seen as a much more important core benefit. From speaking to advisers there seem to be two extremes in the sales process. At one end there is a one-off product sale and at the other, the holistic management of the client's financial affairs throughout their lifetime. Much of the latter process involves clarifying some important milestones and ensuring that any risks along the way are identified, and where possible, managed.

In years gone by and for some people now, a traditional income and expenditure model would look something like this: clients start working, debts mount up with young families and mortgages to consider and in later life they start saving more for their retirement.

However, in the hectic, unstable lives we now lead, much more volatility is involved. This increased volatility and the general changes that are occurring in society have created a much larger demand for IP.

Finding a target

So, who buys IP and who do we sell it to? The two biggest groups are employed males in their late 20s and 30s who recognise the need to protect a young family and the self-employed in the same age bracket who have a need to protect income in the event of not being able to work if they suffer a long-term incapacity. But there are several other significant markets for IP. The female market is massively undersold ' and yet morbidity statistics support the fact that they are more likely to have longer time off work. There are increasing numbers of females in the workplace that need their income protecting.

More and more is being written about the real cost of home care. Home carers, who remain typically female, would cost thousands of pounds a year to replace, and yet it would only cost £16.54 for a 28-year-old female homecarer covered up to age 50, with a six-month deferred period to insure a £1,000 per month escalating benefit.

Stakeholder is generating thousands of conversations if not thousands of pounds commission. This could be an ideal opportunity to introduce either a group income protection scheme, or an employer-sponsored individual income protection plan. If you are providing a range of insurance services to the employer, why not promote this via an extranet site if possible? This upselling of other benefits helps to increase revenue that may have been affected by the introduction of stakeholder pensions, and modern marketing techniques help keep initial acquisition costs down. Keyperson IP is another area that is undersold in the UK.

Finally, an often forgotten group for this market is the middle-aged market. This group is becoming known as the sandwich generation, sandwiched between elderly parents demanding care and living longer, and helping children who are moving out of the family home later and leaving university with debts. They need to be in a position to try and maximise savings during their last phase of employment, and a long period of incapacity can have a serious impact on this. It is obvious that these clients, saving in vehicles like ISAs from their income, will be effected immediately.

When you talk to a client about the value of IP ' the likelihood of having a period of long-term sickness in their working lives and the limited value of State benefits if they qualify ' then they generally want to have the cover in place. In fact, it makes sense for them to try and cover all their income. It is the adviser's role to ensure that the client understands these benefits and includes the cover as part of their protection suite.

Speeding up the process

Managing the client's expectations through medical and financial underwriting can take some of the pain out of the delays associated with medical underwriting.

Industry statistics suggest that 20%-25% of all IP applications have some kind of medical loading, exclusion or declinature. This process can take time. To speed this up, rules need to be introduced which will consistently produce results from the details supplied on applications. To aid this, electronic application forms need to appear shorter, but be able to specifically obtain relevant information by drilling down for additional data if a problem is disclosed.

Simple features within the contract can make huge differences to the way the plan can operate over time. An IP contract is the most complex protection product on the market, and like everything, you pay for what you get. As an adviser, you need a good understanding of contract features and be able to explain, without jargon, what they mean to the client.

In reality, the claims process is the most important facet of any IP contract. The client pays their premium, and their expectations are that if they fulfil the policy conditions then a claim will be paid. All insurance companies say they will honour valid claims. The perception is that insurance companies try and get out of paying claims. But this is not the case. Many insurance companies will now use occupational health visitors or companies to help assess accurately an individual`s requirements. It is well documented that early diagnosis and appropriate treatment can hasten an individual's return to good health. It is equally well documented that gainful employment provides social stimulus and most people want to be able to work in some capacity. Where and when appropriate, in the client's and insurer's eyes, rehabilitation and proportionate benefit can help people back to work, without prejudicing their claim.

But most important is that the client feels to be the centre of the whole process. A claims department should offer more than a cheque and should be dealing with that individual on an individual basis.

Back to work

A recent example of lateral thinking to solve a client's problem was when a vet damaged his eyesight severely enough to stop him from driving, but he was able to and wanted to do his job. Paying for a chauffeur solved the problem. Not only did it allow him to continue with his veterinary practice, but it also provided employment for someone while reducing claim costs.

The ability and willingness to pay claims, and to treat clients as individuals is as important in reality as the initial premium.

IP may not help create a family fortune, but it can certainly protect the family and its income in the event of long-term illness. Indeed, the premium is often seen as too expensive when prioritised against other insurance costs. There are plenty of ways to reduce the premium and yet still provide meaningful benefits. IP provides the foundation to financial plans and has its place among other risk products. It gives security to build long-term dreams.

But self-provision is the way forward and there will undoubtedly be an increasing partnership between the State, private provision and insurance companies.