Budget protection is rarely treated as a serious option by advisers and customers but it may not be as much of an oxymoron as some people believe, reports Georgina Kenyon
Most consumers are interested in protecting their interests but many feel unable to justify the expense that comprehensive cover entails. Therefore, in a number of cases, a budget alternative could be ideal. However, is there such a thing as quality budget protection?
Budget income protection (IP) differs from more comprehensive options as it allows customers to have either a lower level of payout, or a shorter benefit term.
Current IP budget options include reduced benefit terms of 12 or 24 month payouts, with the option to consider a longer deferment period or earlier retirement period .
Some companies will also reduce the premium if you limit the income to below 50% of previous earnings. There remain significant differences between providers where some will add higher costs for certain groups, perhaps female applicants or smokers and others will not.
Cost benefits
Yet most industry experts agree that the basis for any protection plan is that it pays out when required. Cheap budget plans will often come at a cost to the customer, perhaps not covering the consumer for what they thought they had bought and needed in the first place.
So what do insurers or advisers think is better, or indeed, plausible - a budget option or partial comprehensive cover? Which in the long run is cheaper?
"That is the million dollar question. Unfortunately, we never know when our number is up or how long we will be off work - but as long as the customer knows what they are buying, some protection remains better than none," says Jason King, managing director at Torquil Clark Life Insurance.
Agreeing with King, Alan Lakey, senior partner at Highclere Financial Services, says: "The determinant on whether a budget option is good value will depend on who is judging. A plan that never paid out because the client remained in good health could be viewed as a waste. Alternatively, the client may feel that the peace of mind was well worth the outlay.
"I have always argued that once diagnosed with a critical condition it is too late so a fully comprehensive plan would best suit all applicants in the majority of cases," he adds.
Lakey outlines the role of the Financial Ombudsman Service (FOS) and the caution needed by advisers when selling budget options.
He explains that it is important to realise that the FOS will usually find on the side of the customer if their policy does not cover their condition when an alternative would have done. "Experts advise that not only does the most appropriate plan need to be considered for a client but a full documentation of the selection process needs to be undertaken so the insurer and adviser are provably compliant," Lakey says.
King adds that mortgage payment protection insurance (MPPI) - which only pays out for a maximum of 24 months and offers less comprehensive cover compared with IP - can be a cheaper and more viable option for manual workers that would struggle to get IP at reasonable premium rate. Generally, whitecollar workers will get better value and cheaper premiums from IP.
Lakey adds that budget options have yet to reach their full potential, particularly with regards to price.
"Given the astounding disparity between provider premiums, such as IP premiums from friendly societies, in comparison with traditional providers I would imagine that there is scope for savings," he explains.
MPPI and accident, sickness and unemployment insurance (ASU) options can provide a budget option for higher risk categories, such as women or people in high risk occupations. However, the main problem with MPPI/ASU according to Lakey is that it is technically a yearly renewable plan and the insurer can simply refuse to renew if claims appear too high.
While declaring"these plans will never pay out for more than 24 months at a time", he also warns that MPPI can turn out to be an expensive option for low-risk applicants.
An alternative is to have a MPPI/ASU plan put in place in order to meet the first 52 weeks payments with an IP plan coming into action afterwards, Lakey says.
Gap in the market
In terms of product development, King hopes for a product that could 'fill the gap' between MPPI and IP.
"A more meaningful proposition would be desirable than what is currently available," he says.
He believes providers will take the best aspects from each product to create a more useful offering. In tems of alternative products, Which? is trying to develop a benchmark stakeholder protection model. Many believe that the stakeholder option is risky but that it could encourage more people to take out protection.
So, while it is true that new products and innovation are generally welcomed by the industry and insurers - and advisers who are always keen for more people to take up insurance - a stakeholder protection model is unlikely to have much impact on lowering premiums as the market price is already very competitive, experts believe.
That said, stakeholders could help increase take up in other ways, suggests King. He says: "It could help clients understanding of protection products enormously and in that way improve take up."
Overall however, the concept of a stakeholder product sets warning bells ringing for some, as such plans are often sold with the premise that advice is not necessary. Lakey urges caution saying that while stakeholder products are usually sold on a non-advice basis it does not mean that they are simple enough to be sold without advice.
One of the problems when people are buying protection is that most of them do not understand how much cover they need.
"The public needs to be shown how much cover they need to meet family and mortgage issues. In my experience, this is often when one of their friends or family has died or is ill," Lakey concludes.
Because of its nature, critical illness (CI) cover is a strong contender for budget options as it is an important but expensive protection product.
A typical example in the difference in cost between a comprehensive protection plan and a budget plan is UnumProvident's two reviewable plans, Elixir Split and Elixir Full.
The budget Elixir Split plan offers limited cover and for a male of 30 years requiring £100,000 over 25 years the cost is £13.20 per month while the more comprehensive plan, Elixir Full, costs £19.27 per month.
The difficulty in choosing a CI plan again lies with whether or not a cheaper option offers any true value as a protection product.
"Which is cheaper: a £100 per month policy that actually pays out one day or a £50 per month policy that never pays out?" asks King.
Lakey refers to Virgin Money's cancer-only cover when warning customers about choice. "Choice is not a bad thing but we do not want to be reducing cover in the search for cheapness. In all walks of life quality has to be paid for," he says.
Another way to take out a cheaper protection option is to buy life assurance with limited CI protection.
Lakey says: "I find I am often recommending a plan that offers full-life assurance but limited CI protection. This is a superior alternative to having no CI cover at all. However, it will depend on the client's attitude to risk and ability to pay."
The future for budget options however seems to be one of growth. Lakey predicts that more budget options will come onto the market, as they seem to be proving profitable.
"I imagine that this is what will happen. Insurers are in the business of selling products and ultimately they will move into any sector that appears to offer profitability. But if this prediction is correct and if such products do take off it will concentrate on the lowest common denominator and reduce the scope of cover and ultimately the likelihood of a claim being paid," Lakey suggests.
"Choice is a good thing but unlike the stakeholder principle these plans cannot be sold without advice," cautions Lakey.
Problem area
Andrew Barr, media relations manager at Axa Sunlife also cautions on buying budget CI: "The Association of British Insurers guidelines mean the product cannot be marketed as CI - it would need to be re-branded. The key issue with cut-down products is that only some illnesses are likely to be covered, so the consumer faces a lottery as to whether they would receive cover if they became ill. Some consumers will get the payouts they need when they get ill, some won't. This makes advising clients to take budget options a difficult area - is it best advice to leave consumers at financial risk of certain illnesses?"
It seems that although advisers may urge caution in buying budget options, consumers are still buying them and insurers are selling more. But it is too early to judge whether a possilbe stakeholder protection plan will result in a better deal for consumers over more traditional budget protection options.
So, budget protection is a plausible option for consumers but care needs to be taken as there are risks. In terms of budget CI in particular, consumers are in danger because they may develop the illnesses that they are not covered for. A mixture of protection may well be the best solution, with life assurance and a CI plan perhaps the soundest solution for consumers looking for a cheaper option.
