The interaction of protection products and the welfare state can throw up anomalies, but there are solutions. Nick Kirwan explains.
For some time now, the industry has been debating the impact that protection insurance claims have on the person's entitlement to means-tested state welfare benefits. The issue has divided the industry into two camps: those who think it's a storm in a teacup, and those who think it's a significant issue.
Either way, the welfare rules do mean that some people might be no better off financially in the event of a claim, because the money they get from the insurance simply replaces money they would have otherwise got from means-tested welfare benefits. It all depends on the type and amount of cover, and the circumstances of the household.
The biggest overlap (but far from the only one) is with individual income protection (IP) which so far has mostly been taken out by wealthier people through advisers for a ‘full' income replacement - no problem. However, products that replace only income in part are more problematic, as is targeting less well-off people. No surprise, then, that this the central issue in the debate on simple IP products.
A key aspect of the debate centres on the extent of the industry's duty to identify customers at risk of wasting their premiums, and steer them to appropriate products.
For those looking to grow the protection market and who see this as the right thing to do, there is now a simple solution. By asking up to five simple questions as part of the sales process, firms can identify potentially affected households and steer them to suitable products.
Although doing this might create a little extra work, customers will be clearer about their specific need for insurance, have a greater propensity to buy, and keep it for longer, all of which is good news. Firms will also gather key insights to help target their customers with future offers that are more likely to be appealing.
This process should also come as good news to the FCA. It's worth reminding ourselves that the regulator requires advisers to recommend only suitable products, taking account of the customer's specific circumstances. In the post-PPI world, insurers are also required to ensure that their products are suitable for the intended target audience at a market level, arguably just TCF.
