Very Important People

Income protection (IP) is an area of insurance that is generally ignored by many people, including young families. This is due to several factors including IP being seen as a luxury rather than a necessity, general ignorance of the types of cover available and the 'won't happen to me' syndrome.

Even if IP is purchased, it is normally done so on behalf of the primary income earner and not the houseperson or main care giver. In fact, many young families do not even realise this type of cover exists as they are far more familiar with IP products which are geared towards an income earner, whether they are employed or self-employed. After all, the purpose of an IP product is to protect someone's income in case they are unable, through illness or disability, to carry out their job and therefore earn an income.

The cost of such cover depends on certain definitions with the most comprehensive invariably being the most costly to purchase. The structure of such cover is well defined for those with an income generating occupation. IP is normally defined and calculated as a percentage proportion of the policyholder's income, the maximum often being between 50% to 65% of the overall income. The definition of 'inability' depends on both the provider, who defines the parameters of cover and the applicant whose definition of such cover depends on the nature of their job. These definitions include 'own occupation,' 'work tasks,' 'activities of daily work or living,' 'any suited occupation' and 'any occupation.'

All the above assumes the only people requiring such cover are income earners. In reality, and especially in a young family situation, this is not always the case. The young parent who chooses to stay at home and run the household is an invaluable resource, which should be protected. After all, how much would it cost to employ a child minder, cleaner, taxi service and a cook?

Filling the gap

Many of the key providers in the market have recognised this need and have introduced IP products specifically designed to meet these requirements. In particular, it has been recognised there is a gap in the market for females, who can obtain IP while earning income and subsequently decide to take a prolonged maternity leave with the resultant limited or no income.

Packages of this kind are often called houseperson's cover and are designed around a maximum level of cover rather than income generated. Although this maximum varies between different providers, it is normally recognised that the upper limit tends to be around £1,300 a month. But this is not always the case as Canada Life for example, offers a maximum of just £800 a month. In addition as the functions of a houseperson vary, so does the definition of what is deemed to be inability to work and therefore a claim. The normal definition tends to be based around 'activities of daily living' or 'daily work.'

So how does this compare with ordinary IP? Obviously, it needs to be broad enough to encompass all the possible functions of a houseperson and at the same time be contained within defined parameters. This is in order for the provider to be able to assess if and when a claim can be made. As mentioned earlier, it is easy to define own occupation when referring to the employed or self-employed.

Friends Provident, for example, will pay a claim if someone is unable to work due to illness or accidental injury resulting in a loss of earnings. Furthermore, its own occupation definition is the inability to perform the main and essential duties of your own occupation or occupations, for example, a window cleaner who is unable to clean windows.

However, in the case of people who do not earn an income this comes in the form of a list of activities. The inability to perform all or some of these, in the case of long-term illness or disability, would result in a claim. In the case of Friends Provident, these tend to be as follows: walking, bending, communication, reading and writing. Failure of two of these five work tasks could lead to a claim.

Swiss Life, on the other hand, has a bigger list of what they define activities of daily working and a failure of three or more of these would most likely lead to a claim. In this case the activities include all five mentioned for Friends Provident plus climbing, dexterity, financial competence, responsibility and independence. The failure of three or more of these would most likely result in a claim.

Many other providers have similar definitions, but vary the tasks and activities on which a claim can be made. For example, the Children's Mutual ' formally known as Tunbridge Wells Equitable ' offers maximum cover of £1,250 per month, based on activities of daily living. It has some flexibility on activities and tasks as these are not stipulated and vary from claimant to claimant depending on their circumstances. It saysl this flexibility would encompass most claims without eliminating any genuine ones.

As expected, such cover has some restrictions in comparison with the standard IP products as the definitions are not as clear-cut or transparent and there is limited cover available. There are also only certain deferment periods and in some cases there is a limit on the length of such cover.

The minimum cover available, for example, may not be sufficient ' particularly in cases where the household has children who are dependent on such cover. Currently, if this maximum level is not enough, then an alternative package is sought to make up the difference. One of the most regularly used alternatives is critical illness (CI) cover. Although it is not as comprehensive as the IP package, CI is less costly due to the nature of the claim definitions. There is also a limit as to when such cover commences, after the occurrence of an illness or disability. In other words, there will be a period when the policyholder is first unable to work before they can claim and for which the provider will not pay the benefit. This deferment period often tends to be for 13 weeks, whereas the earliest deferment period for ordinary IP is four weeks, depending on the claimant's occupation.

It is, however, difficult to identify how the market will develop in the future as it relies on a number of factors, which are difficult to predict.

These factors include:

• The number of people who would be willing to purchase the product.

• How it is sold as well as the emphasis put on it, compared to other protection products in the market.

• The claims history of IP products, such as the number of claims made.

• Future legislative changes.

• Employment trends.

• Running costs of the products.

• Tax treatment. At present, assuming you meet the conditions of the contact, any income claimed under the IP product is free of any tax.

That said, as IP cover for non-earners becomes more popular and awareness of the existence of such cover increases, it is likely to lead to a rise in the number of products of this type.

Looking at recent trends in the market, this is already happening. In particular, the cover is increasingly marketed in the multi-benefit products, through which you can purchase a variety of different types of cover, such as life assurance, CI cover and IP in one package.

Doros Nicolaou is an IFA at Millfield Partnership