When the worst happens...

In recent years Seven Families, a campaign set up in partnership with Disability Rights UK, has been running successfully, and provider initiatives, including LV’s “Wake up to IP” roadshow. This was aimed at raising awareness of IP within the adviser community – why it is needed and how to promote it effectively to clients.

The launch of IP products or enhancements have also been more frequent with the growing trend in limited payment term IP policies, and even a guaranteed acceptance IP policy (thankfully, no Michael Parkinson voiceover or free gift with this one).

Despite such positive steps forward, IP sales still fall way behind life and critical illness. In part, I think this is due to advisers not being able to overcome client objections or, worse still, not even approaching the subject at all. Perhaps the biggest issue is the general lack of public awareness.

As advisers, it is our role to educate both ourselves and our clients. From day one in the industry, I had the importance of IP drummed into me. In particular, for those who are still in the stages of accumulating wealth and/or those with a young family, having IP was considered an absolute priority. Despite this, I find that a large number of advisers shy away from raising the subject with their clients.

Unfortunately, advisers do not have the luxury of choice, and it is their responsibility to approach all areas of advice, including discussing IP, when appropriate. For those who are hesitant of bringing up the subject, engaging a client to think about a situation where they might need IP is often the best approach. More often than not, a client will know someone who has been unable to work due to ill health. If they can relate to it, you can help them to understand the potential need for themselves. Having established that there is a potential need, you will then likely be faced with several objections.

Typical objections from clients tend to include: “It won’t happen to me”, or “It’s too expensive”, but I find that using statistics and/or provider tools often help to overcome these. Providers regularly publish sales aids or have online tools that can give you statistics to demonstrate that the chances of being unable to work due to ill health during working life are significantly higher than those of death, which is why income protection costs more. They also offer tools which reflect the financial shortfall that will occur when absent from work due to accident or illness.

Getting clients to focus on the cumulative potential benefit in the event of illness rather than the single monthly benefit, also improves perceptions. For example, take an IP policy with a benefit amount of £1,000, deferred for six months. On the basis of LV’s average IP claim statistic of 5.5 years, that is an average claim value of £60,000 which, on the face of it, is much more powerful to talk about than £1,000 per month.

When it comes to budget constraints, there are some easy ways to reduce the cost of IP, including reducing the policy term, opting for a longer deferral period or reducing the monthly benefit. Income protection does not have to last until retirement, and could just be set to cover the duration of a specific financial commitment, for example, in line with the term of a mortgage, or until children have completed full-time education. Taking into account other resources, such as savings, or even an employer’s sick pay period can also mean that setting a longer deferral period would be appropriate. If you have not compared recently, just look at the premium saving that can be made from pushing a deferral period from three to six months. In addition, the maximum monthly benefit amount offered by insurers is not there as a target for advisers to aim for, and the monthly benefit could be set simply to cover a specific essential monthly outgoing such as household bills.

If changing the variables still does not do enough to keep the premium cost down, there are now several providers offering limited payment period policies which cost less than traditional income protection policies. While these may not be optimal, having some level of IP is always better than nothing. Not only would a one or two-year claim period see a client through an otherwise difficult financial period, it would also buy them time to make any necessary adjustments if there was no prospect of being able, for example, to return to their previous occupation, or to retrain or downsize the family home in order to release some capital.

This now leads me on to the lack of public awareness. There is a common misperception among some clients that state support would be available to provide for them in the event of illness. While this is true to some extent through Employment Support Allowance, even for those individuals who meet the criteria for the maximum benefit, this is only £109.30 per week (for those aged over 25 in the support group), which is unlikely to provide sufficient financial support for most, and certainly not those with a family to support.

In addition to such limited state support, clients tend to show a general lack of understanding of what income protection really is. The same survey that was mentioned earlier also found that only 19 per cent of respondents claimed to have a good knowledge of IP products. To further support this, I recently had a client who thought critical illness and income protection were one and the same thing, before I talked her through the numerous differences.

While I certainly would not claim to have the solution to the lack of public awareness, I do feel there is a responsibility for the government to address this, along with the need to push individuals and employers to provide for themselves due to the limited state support available. Perhaps something along the lines of the auto-enrolment campaigns which made it on to television sets around the country last year could be the answer – minus the multi-coloured fluffy monster.

Rob May is director and head of broking of John Lamb Insurance Broking