Is the price right?

Income protection is proving a difficult sell. Despite a potential market of at least 21m people, it is estimated that just 6m have coverage through either an individual or group scheme.

The reason for this has confounded advisers and providers alike. As a product that aims to pay a benefit until retirement or upon returning to work, income protection ensures that financial needs are met when it is not possible to earn an income through employment.

Advisers and providers often say that income protection is necessary for the majority of wage earners, not just highly paid professionals and the self employed. But this is a product that is often viewed by many people as too expensive to consider. In 2008, the Protection Review, an annual review of the UK's protection insurance industry, found that 21% of those surveyed said that income protection was not affordable, while another 22% claimed not to be aware of it at all.

With this level of apathy, it should not be surprising to see abysmal sales levels. Statistics from the Association of British Insurers (ABI) show that 135,000 contracts were written in 2008. This was an improvement on the previous year, when the number slipped to 118,000, but is still a far cry from the high of 199,000 in 2000.

Nevertheless, income protection is being promoted as an important tool in planning, an expense that should take priority over indulgences like fancy coffee, satellite television or a selection of magazines each week. But just how affordable is it? MM has surveyed the market of income protection providers for the first time to find out.

Making a case for protection

This product used to be called permanent health insurance but in an effort to make it more marketable, the name has been changed to income protection to better reflect what the product actually provides. However, following the widespread misselling of payment protection insurance (PPI) and mortgage payment protection insurance (MPPI), income protection now has an unfortunately undeserved negative stigma attached to it that no doubt contributes to its low take up figures. But now that the selling of single premium PPI is banned, preventing mortgage brokers from selling these products at the point of sale, there are hopes that the protection market will be able to restore its reputation. Additionally, new products from LV= and Fortis Life now offer shorter benefit payment periods in exchange for lower premiums.

The LV= Budget Income Protection plan will pay out for just 24 months, while the Fortis YourLife plan allows the policyholder to choose how long benefits will be paid. While this may resemble the PPI products that pay benefits for just 12 to 24 months, John Perks, customer solutions director at LV=, says that these shorter term offerings exist to give an alternative to the MPPI products of the past, although takeup of its simplified product is a few percent compared to its main product. While Perks says that his company's view is for income protection cover up to retirement age, he accepts that people are seeking less expensive products and this exists as an option for this market.