ProtectionDec 3 2015

Demystifying risk and reward

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Demystifying risk and reward

The protection gap that exists in the UK is well known.

Research conducted by the Money Advice Service this year highlighted that almost one third (32 per cent) of UK adults have had a serious financial shock in the past five years and just over a third (35 per cent) had insurance in place to guard against it.

A prolonged absence from work through ill health, resulting in lost or reduced earnings, is one such shock.

According to recent figures published by the Office of National Statistics, average regular pay (excluding bonuses) for employees in Great Britain was £463 a week before tax and other deductions.

Although employment contracts will vary, an employee who is off work for between four days and 28 weeks due to health reasons is entitled to a legal minimum of just £88.45 – known as Statutory Sick Pay.

With a shortfall of £374.55 every week and little savings to fall back on, it would not be long before problems are encountered in paying essentials like the mortgage or rent, utility bills, food or even fast broadband by 2020.

Financial advisers have a key role to play in tackling the protection gap and providers should do their utmost to help demystify the process of underwriting individual income protection insurance.

Underwriting income protection contracts differs from critical illness cover or life insurance because conditions considered irrelevant to the critical illness or life insurance underwriter might take on greater significance for income protection.

For example, an individual with back problems is unlikely to worry a life insurer as the chances of the condition resulting in death are very remote indeed.

However, it is of significant concern to an income protection provider due to the fact that it could lead to a long-term absence from work and a claim being made.

When it comes to assessing an applicant, there are a number of tools available to an income protection underwriter; the application form, telephone interviews, questionnaires, GP reports, blood tests, nurse screenings, chest X-rays and electrocardiograms.

Different providers will have different processes – something which is undoubtedly a major frustration to advisers – but the information that the underwriters are seeking to extract will be much the same.

They are looking for a complete picture of the applicant’s health and lifestyle, and to establish the likelihood of a claim being made in order to ascertain whether they are able to offer cover and what the rate will be.

It is not unusual to be able to make a decision based on the application form alone where all the details have been included.