Beware inadequate insurance policies, says adviser

The independent protection expert for protection advisory firm Drewberry, said although it was good to see innovation from providers putting out accident, sickness and unemployment (ASU) policies, or adding conditions to existing policies, these were still inferior to income protection.

Mr Harvey said: "With an income protection insurance policy, there may be an initial deferral period to wait, although some providers do offer immediate day one cover.

"However, a long-term income protection contract will be a claim until such a time the policy holder is well enough to return to work.

"Compare this to an ASU policy. These only pay out for 12 months, and while this is likely to be sufficient for redundancy, there is a serious risk of financial short-fall for anything more than relatively minor ailments or illnesses."

If redundancy cover is needed, this may be better arranged as a separate stand-alone. Robert Harvey

He added that a year was "especially inadequate" for home owners, who in the event of serious ill health, may find after a year that they still have a mortgage to service, but no means to do so beyond basic state support.  

This is even more pertinent, given the various changes to state support which are coming into force later this year. 

Under the new Universal Credit regime, from 6 April this year, the limited capacity for work element will be abolished to mirror changes to employment and support allowance (ESA).

This reduces support for those deemed capable of some work-related activity and, in effect, the value of the support will fall from £5,312 to £3,801 a year.

From 7 December 2016, the benefit cap was reduced. It used to provide £500 a week for single parents and couples and £350 a week for single people with no dependents. But now, the total amount for a couple or single parent is £442.31 a week in London, and £384.62 a week elsewhere.

Finally, support for mortgage interest used to be a significant benefit but, in April 2018, it will be switched from a benefit to a loan. The claimant will have to pay it back when they return to work - or sell their house. 

Also, on 1 April 2016, the SMI waiting period was extended from 13 weeks to its pre-recession period of 39 weeks, with a capital limit set at £200,000, regardless of the increase in house prices and lack of wage growth.

Earlier this year, as FTAdviser reported, provider Best Insurance launched a short-term ASU policy which endeavours to replicate some of the benefits of an income protection plan.

Called Instaprotect, it has no exclusion periods and simplified medical underwriting terms, and the accident and sickness cover requires GP rather than consultant sign-off for all types of claims.

Commenting on the plan, Mr Harvey said: "With regards to Instaprotect, while it’s positive to see product innovation, and certainly the GP rather than consultant sign-off for all claims is to be welcomed in delivering a better client outcome, it still replicates all of the inferior aspects of an ASU policy, compared to more comprehensive income protection policies.

"If redundancy cover is needed, this may be better arranged as a separate stand-alone, although there are now providers who offer this as part of a menu plan alongside full income protection, life assurance and critical illness cover."

Find out more

For more on income protection, read FTAdviser's Guide to Income Protection, which qualifies for 60 minutes' worth of structured CPD.