The myth that income protection is limited to those with medium to high levels of disposable income is something the industry is keen to dispel. Mark Anders explains
Income protection (IP) has been the subject of much commentary over the last few years. Those providers and distributors involved with IP sales continue to champion its cause. The issues preventing the IP market from growing are well documented, with price, product complexity, and lack of consumer education being significant barriers to improved sales.
Price is always an issue with protection products, and limited budget will often be cited as the main reason for avoiding suitable and reasonable income replacement insurance. However, the benefits afforded by IP should not be underestimated and, in many instances, it is possible to dispel the myth that price should be a significant barrier. There are many individuals with limited budgets who could benefit from IP.
Budgetary limitation is often enough to make consumers and distributors overlook IP products in favour of cheaper alternatives. The industry therefore needs to provide more education to demonstrate the versatility and flexibility of many IP products when budget is a strong consideration.
Consider Ben, a 25-year-old non-smoker, earning £24,000 a year as an architect. Ben has commitments, including mortgage payments, of £1,000 a month. He would like to cover his monthly commitments and knows his employer will continue to pay him for three months if he is unable to work. He would like to keep within a budget of £15 a month. What would be the IP options available to him and what would they cost?
An IP plan with Liverpool Victoria providing £1,000-a-month benefit with a deferred period of 13 weeks written to age 65 would cost £17.58 a month. While this seems good value for the level of benefit, if his budget would not allow for this premium, he could tailor the cover to suit a more manageable budget. The easiest option would be to change the deferred period to six months, which would reduce the premium to £14.58. He would have to rely on savings or state benefits for any period of illness lasting between three and six months when his employer would stop paying, but he would reduce the monthly premiums. By moving the deferred period to 12 months he could reduce the premium to £13.32. It must be remembered that while this would reduce premiums, he would need to think carefully about the capability to replace his income for the first year of any serious disability.
Alternatively, the level of monetary benefit could be reduced to a lower level. For example, reducing the cover to £500 and maintaining a 13-week deferred period would result in a monthly premium of £9.79. This would potentially assist in keeping the premiums within a tight budget, but it must be remembered that it may not be possible to meet all ongoing commitments even in the medium term. Another option would be to reduce the maximum term, possibly reducing the term to age 60. This would have the impact of reducing the original premium of £17.58 to £13.72 for £1,000 a month with a deferred period of 13 weeks.
Wherever possible it will nearly always be beneficial for the consumer to create a 'budget' package from a conventional IP policy. This is because IP is the most suitable way of providing protection against any long-term disabilities, with most other forms of income replacement having claims restricted to 12 or 24 months in length.
The mortgage market is inevitably one of the main triggers for recognising any IP requirements. But these quality IP products have had to compete with products such as mortgage payment protection insurance (MPPI) and payment protection insurance (PPI), which have been heavily sold in recent years. Research by the Council of Mortgage Lenders suggests that 73% of consumers purchase MPPI from their mortgage lender. But is that the cheapest alternative?
Relative cost
There appears to be growing recognition that PPI products are often relatively expensive for the actual cover they provide with significant margins often being made as profit for the provider. Many organisations including the high-street banks have been reporting vast profits on the back of MPPI and PPI sales. On the face of it, the products themselves are simple to understand and do not have any significant underwriting, but do they represent value for money, and most importantly, will they pay out in the right circumstances?
Inevitably, there is a significant difference between MPPI plans and conventional IP plans, which are designed to provide income replacement through to a specified retirement age. For example, if a 40-year-old developed a condition such as multiple sclerosis, which is likely to have long-term degenerative implications, it is possible that a claim on IP may be paid through to age 60 or 65, depending on the selected retirement date at outset. The same individual with a standard MPPI product is likely to receive benefit for a maximum of 12 months (some policies pay for 24 months), regardless of the severity of the disability. Statistics from the IP Task Force White Paper, published in December last year, show that 48% of incapacity benefit claimants have been claiming for at least four years.
Additionally, some MPPI products will have severe limitations, including a broader set of exclusions on claims and lack of flexibility if the consumer wants to change the benefit structure of the plan. Some MPPI plans are not even transferable if an individual chooses to change mortgage lender.
Inevitably, for the consumer there is always pressure on the budget they can commit to their protection needs. IP providers have designed specific 'budget IP' products that pay out for a 12-month or 24-month period in the way that MPPI products do. However, there are a number of ways to look at how IP can provide an alternative to MPPI and compete in a way that suits consumers looking for protection on a budget.
Consider Mike; a 40-year-old, single male working as a solicitor with mortgage commitments of £1,000 a month over the next 20 years. What would be the income replacement options for Mike to consider?
He could take out a standard MPPI product for accident and sickness, which would pay a benefit of £1,000 a month for a maximum period of 12 months. The premium quoted for this cover with Pinnacle Insurance, a leading MPPI insurer, is £24.50 a month with a deferred period of 30 days and a number of significant exclusions that may make a claim invalid. There are a number of options that conventional IP could provide as a suitable option while still working within the client's budgetary requirements.
For Mike, Liverpool Victoria could provide cover to age 60 with a four-week deferred period for £1,000 a month at £40.93 a month. This may not provide the budgetary solution but it must be remembered that this solution would provide extended cover right through to age 60 in the event of a serious disability that prevented his return to work. This is a more comprehensive way of providing IP and if budget remains a barrier, the same cover could be provided on a 13-week deferred period for £25.21 and £20.68 on a 26-week deferred period. Would this be a better option than the MPPI, which has a short deferred period but will only ever pay out for a maximum 12-month period?
If Mike still wanted to cut back on the cost, he could consider a 'budget' style IP policy. Mike could have £1,000 a month benefit on a four week deferred period using Liverpool Victoria's Budget Income Protection Plan at a cost of £19.76 a month. This shows how MPPI products are not always the best option and the product quality underlying an IP product is well worth consideration. It is often considered as a more expensive option, which is clearly not necessarily the case. The premiums for both budget and full income protection can compete with MPPI if price is a major consideration.Also, the product specification may provide the individual with more robust protection in the event of disability.
Affordability
Affordability becomes even more of an issue when considering low income workers. There is a myth that IP is unattainable for those on lower incomes where budgetary demands become even more focused. It could be argued that even for those workers on incomes as low as £10,000 a year a quality IP product may be affordable.
When considering IP for a client with budgetary constraints, it is important to think how the product may be flexed to match the client's budget. Most clients do not need the maximum benefit level under a plan but they should try to cover their reasonable ongoing living costs. Deferred periods should, where possible, match up with the time frame for employers continuing salary payment, and selected age for the plan should match as closely as possible the individuals own retirement plans. However, all these features can be flexed to package a solution, which is manageable within the client's budget rather than leaving a client with no cover in place. It may sound like a cliché but some cover is better than no cover.
Mark Anders is head of sales (South) at Liverpool Victoria
