Assured Futures' Ian Sawyer explains how redesigning income protection could unlock it
A year and a half ago I wrote a blog about critical illness (CI) cover and suggested it should be marginalised or even removed as a product.
It's fair to say it put the cat amongst the pigeons, if you'll forgive the Bros reference, but I said this because I genuinely believe that CI gets in the way of what most people really need, which is income protection (IP).
My views sparked controversy at the time, and although many colleagues agree IP should be the core protection product for most people, I also agree with the recent Financial Services Consumer Panel (FSCP) report, which says we need
s a radical rethink by all parties before IP can become a mainstream product.
So, what would it take to put IP centre stage?
I don't believe it will happen while CI exists in its current format and while the industry is set up to sell life and CI. The industry is biased towards CI because of habit, and because of how embedded it is within the product set, processes and systems.
Mortgage brokers, in particular, are often fixated on CI because it's a tick-box on the life cover form that has historically been marketed as a mortgage protection product. But people don't necessarily need a lump sum - and what is the point in paying off the mortgage if you can not afford to live in the house?
But while CI is no longer fit for purpose, arguably, neither is IP. It is more suited to client needs than CI in terms of providing income replacement, but it's clearly not mass market friendly and no amount of consumer education is going to change that.
In its report ‘Understanding the protection gap' the FSCP explore customer attitudes to life insurance and why they are more likely to buy CI instead of IP. They are keen to see simplified versions of IP launched to reach the mass market and they are asking the industry to work together and consider what that product might look like, what needs to change and why.
In response, here are three things we need to do to properly grow IP sales:
1. Redesign IP to include life cover
I am not talking about an accelerated benefit - rather, the life cover should be separate but paid as an income for an agreed amount of time, such as 100 months (eight years). Whether or not cover is accelerated or separate could be an option, as it is with CI, but either way life cover would represent a small cost on top of IP, and it could be convertible to a lump sum if needed, as per family income benefit.
I am aware this is not a million miles away from some packaged product structures of the past, and maybe those ideas came too soon or seemed too complicated. But the redesigned IP I'm suggesting would take some of the elements from past structures but package them in a much simpler manner: IP representing the central component, with life included. The product should also have an unemployment cover rider and the option to add a very basic CI (key 3 type) policy if needed and as a separate benefit.
2. Regulation that ensures protection is properly discussed alongside mortgage sales
As discussed in the FSCP report, better outcomes for customers could be achieved through improved ‘cooperation of the regulator, product providers, reinsurers, lenders and intermediaries': cooperation in terms of both designing product solutions that have mass market appeal and also in ensuring the right discussions with consumers, in the right place and at the right time.
As highlighted by the FSCP, more education for consumers - based on today's product options - is not the answer, nor is ‘persuading more mortgage intermediaries to recommend income protection' or recommending products which provide inadequate cover because they are an ‘easier sale'. In short, offering more of the same is not the answer. All advisers, mortgage or wealth, must be compelled to advise clients protect themselves appropriately and advisers must either write the business themselves or refer to a specialist.
3. Fix the process because one in four IP applications is lost during underwriting
We should place IP cover on risk as standard from day one, while being underwritten. Premiums would be collected, but with any pre-existing conditions excluded until the underwriting decision is made.
If people were covered from day one (and paying premiums) I believe the net take up would be far higher and many more customers would become covered, growing the market by perhaps as much as 20%.
Ian Sawyer is managing director of Assured Futures
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