Is Income Protection the adviser’s greatest hidden asset?

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In an Income Protection report last year, the consumer association Which? concluded:

“The one protection policy every working adult in the UK should consider is the very one most of us don’t have - income protection.”

People will insure virtually everything. As well as compulsory insurance, they buy cover for white goods, mobile devices, pet geckos and even moustaches.

Yet very few insure against losing their most valuable asset, their ability to earn.

Nine out of ten people who could benefit from Income Protection (IP) don’t have it.

Lots could be done to turn the tides in favour of IP take up, but it’s a true ‘boiling the ocean’ challenge.

Much work is being done by trade bodies, interest groups and providers – to increase public awareness, to create new (and simpler) IP propositions and to lobby policymakers about removing barriers to IP.

Who knows, George Osborne might have a radical re-think about IP in his next budget!

But in this article, let’s focus on what you can directly influence as an adviser.

The three big IP barriers, according to advisers

In November last year, LV= surveyed advisers about IP. Over 700 responded and shared their thoughts on a whole range of issues relating IP products, what they want from providers and IP in general.

What came through clearly was that only small minority of advisers sell IP routinely. Some sell it occasionally and some not at all – and almost everyone finds it difficult.

This is reflected in the business statistics. Only around 100,000 new IP policies are taken out every year and IP represents just one in every twelve protection policies sold.

In the LV= survey, advisers said their top three reasons for not selling IP were:

1. Client not seeing a need for it/not being asked about it

2. It’s expensive

3. Not sure what IP to recommend/it’s complicated

Let’s consider each in turn.

1. Unveiling the need and getting clients switched on

The truth is that not many clients know that ‘income protection’ exists. And they can often confuse IP with PPI... and all the nightmare stories about that. So, very few people are going to proactively ask for it.

Dovetailing IP with your way of working

How do you introduce your client to the importance of protecting their income? And where does ‘protection’ fit in to your advice process? There’s no ‘silver bullet’ single answer; it’s very much an individual business thing.

But here are a few pointers we’ve learned from working with advisers.

Most protection is sold/taken out as a result of a life event, and most commonly when buying a/or moving home.

The new MMR regulation is focused on people’s ability to afford and repay their mortgage.

But the regulations fall short of requiring a borrower to have provisions in place to afford and repay their mortgage if their income stops.

As a professional adviser doesn’t it make good sense – and prove your value – to ensure your client is taken care of no matter happens (good or bad)?

How do you set out your stall with mortgage clients? Some explain it very simply along the lines of“I’m here to help you get the home you want and make sure you keep and enjoy it, come what may.”

Do you talk about the importance of affordability if the unexpected happens and the journey you’ll take them through? This doesn’t mean you have to dive straight into a protection fact find.

It simply helps the client to buy into you, into what you do and what it gives to them. And it avoids any unwelcome surprises or awkward conversations down the line.

Some advisers manage expectations by asking for an overall mortgage and mortgage related ‘monthly budget’ from their client and ‘contract’ to work to this for both the mortgage and relevant protection (which could include buildings and home & contents too).

Where you fit the ‘protection’ conversation into your process is down to you. It needn’t be a totally separate exercise.

As part of the affordability discussion for a mortgage many advisers capture income and outgoings. You can use an (IP) budget planner for that purpose, and start to sow the protection seed for later.

Handling the usual objections

No doubt you’ll be familiar with all the usual client objections to ‘income protection’ – “I can’t afford it”, “I’ll get state benefits”, “we’ll get by” and so on.

There are plenty of materials and training support from networks and providers on ways of handling these.

One of the best tips I’ve heard from advisers is not to mention ‘income protection’ at all early on.

They focus the conversation on exploring the importance of protecting income, what the client would or wouldn’t like to happen if, and the practical and emotional implications involved.

A budget planner together with the simple ‘PIGY’ questioning structure can help this really come alive and make matters far more emotional. If you were unable to work...

“What Problems would you face?”

“What Implications would that have (for you and your family)?”

“What would you want/have to Give up?”

“How would that make You feel?”

[Strange isn’t it how people suddenly become invincible when discussing protection; convincing themselves that “it won’t happen to me”’? Stats and real life prove that sickness, illness and accidents do happen.

At LV=, we’ve developed a tool for advisers to use with clients that tackles this false perception head on.

The LV= Risk Reality Calculator is a simple and powerful online tool that can help your clients grasp the importance of financial protection in just 5 seconds.

You just need to enter four personal details about your client and instantly their personalised results will reveal the likelihood of them

• being unable to work for two months or more (due to sickness or accident)

• suffering a serious illness

• dying

• and the probability that any of these could happen before their chosen retirement age.

Advisers who are using calculator tell us that it’s flexible and easy to use and makes their client conversations far more immediate, personal and real.

Let’s put it another way

Many advisers we work with use analogies or sales concepts to help clients understand the importance of protecting their income. Providers and networks often feature them in their IP training, so look out for the

• four boxes

• ‘money making machine’

• ’plug’.

All are very simple, involve the client and can be used with just a pen and paper and a bit of well -

practiced delivery.

2. It’s expensive isn’t it? Well, it doesn’t have to be

Research has indicated that consumers vastly over inflate the perceived cost of insurance. Some people overestimate the cost of basic life assurance by as much as five times.

IP is more expensive than life or critical illness cover, as the risk is higher. You’re more likely to fall ill than die. But it doesn’t need to be ‘expensive’ or unaffordable.

Skiing downhill

Our analysis of quotes on portals indicates that many advisers quote for maximum benefits. And that’s a great place to start – but it’s a not a ‘take or leave it’ offer. If affordability is an issue, you can choose a number of routes to adjust cover and reduce the cost to a more affordable level for your client.

For example:

• Choose a longer waiting period, most providers offer a wide number of options.

• Reduce the cover required. What monthly benefit does you client need, rather than want?

• Reduce the plan time length. Do they need to cover a particular time period only?

• Consider the type of premium - guaranteed, reviewable or age banded. Beware though, what might be cheaper now, can soon ramp up later.

• Choose a ‘budget’ plan. These operate a limited claim payment period – usually a year, or two or five years. LV= budget IP can cost as much as 70% less than LV= full IP.

Remember too, that IP benefits are paid free of income tax and there should always be a financial incentive to return to work.

An example of how cover and cost can be tailored to suit the client’s budget

Karen Wallace is aged 35 and an administrator in an office. Karen doesn’t smoke and she earns £36,000 a year. She’d like cover to be index linked, include waiver of premium and run to age 65.

Her employer provides full salary for 2 months in the event of sickness.

Below, we summarise some different solution and cost scenarios for Karen, starting with ‘full cover’ with maximum benefits (using the LV= approach of 55% of gross earnings with no deduction for state benefits) with an initial monthly cost of £66.35.

If cost is an issue, then we use some of the approaches already listed. A budget plan from LV=, for the Karen’s full cover, would cost just £19.05 a month - a whopping reduction of 71%.

3. Not sure what IP to recommend and does it do what is says on the tin?

Your choices and recommendation will be largely geared around your client – their age, health occupation and affordability. From a client perspective, they’re particularly interested in whether their plan will pay out when it matters.

So let’s consider some of the ‘does it do what it says on the tin’ aspects of IP.

ASU

Although not true IP, Accident Sickness and Unemployment (ASU) can offer some protection, usually for a limited period, with benefits linked to mortgage payments and often without any underwriting.

The contract is a usually annually reviewable or renewable. And it can be cancelled by the provider. So it can be cheap, easy to take out, but will it pay out? ASU providers aren’t required to and don’t usually publish their claims performance, but have to do so on request.

Higher risk occupations

For those clients in higher risk - usually manual - type occupations, there are IP policies available from specialist friendly societies, as well as the recently launched Personal Sick Pay from LV=.

These types of specialist income protection can also be used to target clients who find it harder to prove how much they earn (e.g. the self-employed) with providers taking financial underwriting out of the equation for certain levels of cover.

Definition of incapacity

One of the more recent industry hot-potato debates has revolved around the definition of incapacity used by providers.

A number of providers have moved to an ‘own occupation’ definition. So if the client can’t do their own job, the policy pays out.

Yet be wary of hidden nasties, some providers have cut the number of occupations they insure and some may only use own occupation for an initial period of a claim, before either reducing cover or moving to a task based definition.

Budget plans can help reduce the cost significantly, by limiting the claim period. Some though only allow one claim and then the policy is cancelled.

Claims philosophy

Another factor to consider is a provider’s claims philosophy. Will they deliver on their promise? Some offer individual claims managers and proactive help and support to help claimants return to work. Check out the providers’ claims performance.

The future’s bright, the future’s IP

There’s no denying it, IP isn’t a slam-dunk easy subject for consumer or advisers to grasp.

Yet, as Which? advocate, it is ‘the one protection policy every working person should have’.

And IP represents a true opportunity for advisers to ‘beat the internet’ and demonstrate their professional value.