Whether protecting their family or a property purchase, a client’s protection requirements are seldom met by just one product. But, although they may have a need for a mix of covers, there is still little appetite among insurers to create a product that combines income protection (IP), critical illness cover (CIC) and life assurance.
However, interest has been reignited with the launch of Holloway Friendly Society’s Critical Illness IP plan. This pays an income if someone is unable to work as a result of a specified critical illness including cancer, heart attack, stroke and multiple sclerosis.
Given the more restricted benefits on offer, Holloway’s sales and marketing director Mathew Manser admits the product will only appeal to a small group of customers.
These include individuals who may have struggled to take out IP due to pre-existing conditions as well as people who might not be concerned about some of the more traditional IP claims conditions restricting their ability to carry on working. “Work and healthcare has changed significantly since IP plans were introduced more than 100 years ago,” Mr Manser explains.
“Thanks to technology, many people, especially in occupational classes one and two, would be able to work from home if they had a bad back. They are more worried about what would happen to their income if they contracted a critical illness,” he adds.
The cover comes with a choice of three deferred periods – with the shortest four weeks and the longest 26 weeks – and it will pay up to 60 per cent of gross income up to a maximum of £120,000 a year. Premiums are guaranteed and level, and the plan has an own occupation definition of incapacity.
The pricing reflects the more cut-back cover on offer, with premiums around 45 to 50 per cent lower than on Holloway’s standard IP plan. As an example, a 36-year-old with a class one occupation, such as an accountant, would pay £23.39 a month for £18,000 of annual benefit with a four-week deferred period.
Mixed reaction
Unsurprisingly the plan has received a mixed reaction from the protection industry. Alan Lakey, managing director of CIExpert, describes it as an interesting jump forward and one he believes other friendly societies may follow. “It will suit some people but the cover is more limited so it has to be cheaper than standard protection products,” he says. “The potential payout could also be a lot lower than on a traditional CIC plan, as someone might only be unable to work for a matter of months and would not receive payment until the end of deferred period.”
It is also important to note that it would not pay out for the two conditions that make up the bulk of IP claims – musculoskeletal and mental health disorders.
The effect of this can be illustrated by looking at the insurers’ IP claims statistics. For example, taking LV=’s statistics for 2014, although cancer was the top cause of claims, accounting for 23 per cent of claims paid, musculoskeletal disorders and mental health issues were just behind at 20 per cent each. Add in the fourth most common cause of claim – accidents at 13 per cent of claims paid – and already more than half of the claims on a standard IP product would not be paid on the Holloway CIC IP plan.
Further, while the product may be new, it is possible to achieve a similar income through a family income benefit (FIB) CIC plan. Like the life assurance version of this plan, this pays an income for the remainder of the term but, rather than paying on death, the claim is triggered by the diagnosis of a critical illness. And, unlike Holloway’s plan, there would be no deferred period and the benefit would continue even after the policyholder returned to work.
Unfortunately there are very few players in this market and, perhaps due to this, sales figures are muted. According to Swiss Re’s Term & Health Watch 2015, there were only 2,770 sales of FIB CIC in 2014. This compares to sales of 25,700 for FIB without CIC and 211,700 for the traditional lump sum level term assurance with CIC.
Mixing it up
While it may have a relatively limited use, Holloway’s plan is still applauded for its innovation. Chris McNab, manager of the protection proposition at LV=, explains, “I would support a full IP plan from a consumer’s point of view but there is a market for this type of product. In addition, by combining the two concepts, it helps to create interest and raise the profile of IP.”
Combining these two elements of protection may also lead other insurers to consider mixing up products a little more to suit changing consumer needs. This is supported by Emma Thomson, life office relations director at LifeSearch. “Consumers like the certainty of the lump sum paid out on CIC but also the flexibility of the income paid on IP. Combining both types of cover within one product can be cheaper than buying them separately and it also increases the chances of a payment,” she explains.
These pluses for consumers mean some insurers have already experimented in this area, with several launching menu-based products that enable an adviser to pull together a package of protection that suits a client’s needs.
These include Zurich’s Payment Protection Benefit, which can be included alongside life and CIC to provide an income if the policyholder is unable to work as a result of illness or injury. As any ongoing payment from this benefit ceases if there is a subsequent claim under the CIC or life policy, it helps to reduce the cost of cover. For example, when it is selected alongside CIC, it can be up to 27 per cent cheaper than if it were sold alongside life assurance.
Another product that allows different types of protection to be combined is the former Ageas product, Real Life Cover, which includes life assurance, CIC, IP, recuperation cover and carer’s cover.
With this, while the sum assured for the life cover is fixed, any benefits paid for claims during the policyholder’s lifetime come out of one pot, which reduces as benefit is paid.
Combined challenges
Unfortunately, the fate of this plan is an indication of some of the issues facing this type of product. When AIG Life bought Ageas Protect, its review of its products led to it withdrawing Real Life Cover due to a lack of sales.
There are a number of reasons why sales on these hybrid products can fail to stack up. First, while it might be simpler to address all of a client’s protection needs within one product, advisers are often cautious about recommending the one-stop-shop approach. “Many advisers prefer to select best of breed for each product,” says Ron Wheatcroft, technical manager at Swiss Re. “There can also be concerns that the insurer might pull the product if it fails to achieve sales targets.”
The products can also suffer as a result of their uniqueness. Being a bit different to the rest of the market means it can be difficult to include them on comparison and aggregator websites so they slip off advisers’ and consumers’ radars.
Even where an adviser does recommend a combined product there can be issues. For instance, Peter Le Beau, chairman of the Income Protection Task Force (IPTF) says that the underwriting on the IP can often hold up the rest of the sale.
He adds that careful consideration also needs to be paid to claims under a combined product. “You need to have a convergence of the claim conditions. Lump sums being paid on IP definitions sounds great but it could lead to windfall payments if the claimant recovers,” he says. “Similarly, you cannot exclude CI claims that would be paid under IP.”
But in spite of these challenges there is still appetite to look at ways to package protection that will appeal. And, as consumer needs evolve, the success of this type of innovation may prove to be much less elusive.
