It’s time to put income first

After all, everything we do in life, from paying bills to going on holiday and feeding the family, derives from what we earn, but despite demanding pole position in the protection hierarchy of needs, income itself has always been placed a poor third behind life insurance and critical illness cover when it comes to sales.

There are several reasons for this. First, many life insurance companies do not place much priority on income protection because it forms such a small part of their overall protection book. There is more volume of sales available with life insurance and critical illness cover, and often higher margins. Therefore, product developments and marketing campaigns for these product lines often take priority over income protection. So it can be difficult to make the business case for income protection development when market shares are low.

Second, income protection is a very compex product, even from the point of view of explaining the benefit. If you think about the messages for life insurance and critical illness cover, it is simple: if you die, your family gets paid a large sum of cash; if you get a critical illness, you get paid a large sum of money.

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Unfortunately, with income protection the benefit is not so easy to explain. For example, the amount of cover is uncertain until the point of claim. Okay, so at the outset you will know that you are covered up to a certain percentage of your salary, but the benefit that will be paid on disability is usually based upon the salary you are earning at the time you claim. And the state benefits claim might be deducted from this amount. It may also be reduced if you work part-time or return to work in a lower capacity job.

The other big issue with income protection policies has always been the definition used to measure incapacity. Until recently, there have been up to five different definitions.

The ‘own occupation’ definition is by far the easiest to understand and obviously provides the most comprehensive cover. I believe the ‘own or suited occupation’ definition has always been open to misinterpretation. I remember having conversations about the ‘any occupation’ definition from concerned policyholders who felt they would be denied a payment if, although severely disabled, they could still do a job pushing buttons. I sometimes struggled to believe my own written assurances to the contrary.

Then there are definitions based upon the ability to perform ‘work tasks’ or ‘living tasks’. Historically, work tasks have suffered from the same impossible-to-claim tag as the any occupation definition, due to the harshness of its terms.

For years advisers have been clamouring for insurance companies to offer only the own occupation definition, even though some occupations might become uninsurable. Well, this is finally starting to happen. Pressure from advisers and consumer groups has led to launches of products that only use the own occupation definition. And, even better, the number of occupations for which it is available is ever increasing. Now up to 95 per cent of occupations qualify, compared to perhaps 75 per cent five years ago.