Little by little

Many advisers tell providers their clients are not interested in buying income protection (IP) because it is expensive and they do not s ee the benefits.

But what else will ensure clients' financial goals are met if they are unable to work for even a short time? And how much worse would their financial distress be if they were unable to work again? For people living on a tight budget, the knock-on effect of losing a regular income can be dire.

There are statistics to show how many people at any time are unable to work due to an accident or long-term sickness, usually expressed as equal to the population of Sheffield or Coventry.

A difficult concept for anyone to understand, but ask a client how important their income is and they usually agree it is vital to maintain their standard of living. Ask them how long they could live without it and they do not think they could manage without next month's income, never mind the rest of their lives.

Many clients may not want to talk about IP because they think it is expensive, or they may not be able to get a policy. There may be a health issue, or perhaps they work in a hazardous industry. All these aspects are true in some circumstances, but not in every case.

So how can people living on a tight budget afford to protect their income?

We are all only able to protect up to 75% of our income and if you are looking at low income clients, they should be able to afford t he premiums as they will be relatively inexpensive.

Driving down cost

Before advising clients on IP products, it is important to understand the factors insurers consider when calculating premiums. IP premiums are based on gender ' they are cheaper for men than women. They are also based on age ' young people are cheaper to insure than older people.

Occupation is also taken into account. All jobs fit into one of four classes and are based on how likely it might be that your job will result in a claim. For example, working at a desk all day is relatively low risk, but the risk increases if you are telephone selling or working in a call centre where there is a high incidence of stress, not to mention repetitive strain injury.

Do you drive more than 18,000 miles each year for work? If the answer is yes, then you will be rated for the additional risk this entails.

If you fly regularly for work, it may clock up the air miles, but it also may knock you into the next category. It is no surprise the riskier the occupation, the more expensive the insurance will be.

If a client has a history of bad health, which has meant they have taken time off work due to a condition or illness, this may result in a premium loading. Alternatively the insurer may apply an exclusion meaning that the policy will pay if you are not able to work, but not if it is as a result of a pre-existing condition. Many people see this as unfair, but why would anyone insure someone who has had time off work due to a bad back or stress without such a clause? However, it is worth bearing in mind that unreasonable decisions can be challenged and are sometimes changed.

If you have a pre-existing condition it is worth making an application to more than one company to get a range of options. Not all underwriters have the same outlook and perhaps you can get cover from company A when company B is not interested.

If your client takes part in a hazardous pursuit, such as mountaineering or diving, this will also increase the premium.

When discussing budget IP options with your clients, it is also important to find out how much money they have in savings. If they have enough funds saved to be able to pay their bills for a month or longer, they could manage with an extended deferred period, meaning the premiums will be reduced.

Finally, smokers are often highly rated, so it is important clients disclose all information from the start. If they want to get value for money, getting a claim knocked back for non-disclosure is not the best route.

So taking into account these factors, a good way to ensure low premiums is to be a young, non-smoking male in a low-risk job with no risky hobbies. The premiums are then extremely competitive. But how can the rest of us reduce the cost?

Number crunching

First, calculate exactly how much income clients need to live, excluding luxuries.

Would their employer pay their income for some time? If you can have a longer deferred period, then the premiums reduce.

Is your client a member of a pension scheme? The best plans will pay a reduced pension if you cannot work again.

It is also wise to find out if clients are currently spending money on this type of plan without really knowing it. They may have a policy with their building society, which is paid as part of their mortgage. If so, you may find you could get better, more permanent cover with an IP policy.

Mortgage providers' policies usually pay benefits for up to 12 months, but if you have a permanent problem a temporary solution is not good enough. If you cannot work again it simply delays the harsh decision for a short time.

It is useful to find out whether clients have taken out any loan insurance to cover payments. These policies are expensive and often the total premiums are added to the loan at outset, so you cannot cancel the policy during the loan period to use the money for better protection.

Once you have all the information about current expenditure and current planning, you can look to ensure the policies do what they are supposed to do, which is to give peace of mind.

But suppose your client has nothing in place and they are on a tight budget. After calculating how much they need to protect, you need to compare costs to find the best option.

Ways to reduce the costs may be to take a policy that has reviewable costs. However, this could mean the insurer increases premiums in the long term if they find their costs and claims experience are more expensive than they calculated at the start.

Another way to reduce costs is to have the payments stop at age 55, rather than 60 or 65. If the mortgage has been repaid and the children have completed full-time education this may be an acceptable option.

For example, Zurich Life is currently reviewing its old reviewable policies and a typical hike in cost is from £72.08 to £169.27 a month. By re-broking you could offer guaranteed rates from Friends Provident with a premium of £137.54 ' a saving of £31.73 or 18.7%.

Future risks

Insurers are facing high levels of claims and may decide they are unable to offer guaranteed rates, which could result in many people being priced out of the market.

UnumProvident offers a policy that will pay for a limited period of five years for a reduced premium. This looks like a positive way forward, seeing as a high level of claims last less than 12 months anyway.

But suppose your client is one of those who will never work again? Would you want them to have a policy that stops paying after five years? Clients do have to understand the risk involved. The suitability letter should make it clear exactly what they will be protected against ' or ensure you have a good professional indemnity policy in place.

Clients have choices to make and how they spend their money on protection is just another one. If they decide an IP policy is a priority, then they will find ways of paying for it. They may not be able to buy as much protection as they would want, but if they can pay for the basics ,then it is a good place to start.

Diane Saunders is head of Diane Saunders IFA