There is increasing pressure for the government to reform the welfare system with a key role for income protection (IP) in helping families develop a safety net, the Association of British Insurers (ABI) has said.
The ABI has published a paper - Welfare Reform for the 21st Century - setting out the case for protection insurers, government, employer bodies and other stakeholders to work together to increase use of income protection through the workplace.
Each year one million people have to stop work for more than four weeks due to illness or injury and quarter of a million workers leave employment due to ill health.
The trade body said it is "concerned that so many households are exposed to risk, get very little income support from the State but are not using income protection insurance to provide a much needed safety net."
Research conducted by the Centre for Economic and Social Inclusion (CESI) for the ABI revealed 10.8 million working households would see their income fall by more than one third if the main earner has to stop work due to ill health. This is equal to 60% of UK working households.
However, less than 1.2 million people have bought individual IP. Around 2 million more people are covered by group IP provided by their employer.
The report identified low-take up rates of IP as being due to a combination of inertia, lack of trust, complexity and perceived value.
The ABI's report calls for the following aims:
• Increase public debate, awareness and understanding of health related income risks;
• Develop a role for all employers in providing access to, and use of, IP through the workplace;
• Build and use evidence on the impact of rehabilitation, and what interventions have a significant impact - The ABI has said robust evidence on the impact of rehabilitation is lacking
• Explore the potential to expand rehabilitation services to help more people back to health and fitness - and back to work - faster, as well as minimising long term health and disability problems;
• Ensure the tax and welfare systems provide effective incentives and rewards for using IP;
• Achieve an easy to understand balance between State and private insurance.
In the report CESI modelled two alternative forms of insurance provision based on schemes in Australia, the US and the Netherlands - time based collective insurance and individual income replacement.
Paul Avis, marketing director of Canada Life group insurance said: "One of the challenges we face is identifying the need and with the current state benefit complexity, it is incredibly hard to understand how an individual would be affected if they became sick or disabled.
"My advice to any adviser who is visiting an employer or group HR director to talk about income protection is to run through calculators (which calculate state benefits and income protection salary equivalents) to identify the reduction in income should they fall sick. Unless state benefits are made much simpler and are more clearly explained to consumers, the insurance need is not being established.
"There are also different tax regimes available to IP, group IP and ill health early retirement pensions - there needs to be a clear campaign to simplify the taxation treatments of all three vehicles. For advisers, it is important they look at the individual's circumstances to look at what they will and won't get from their employer and what they will get from the state."
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