Income protection (IP) is designed to offer that much needed safety net against income shocks - it works, when you can’t. Yet far too many people - including many of those who have received financial advice-don’t have IP.
The fact is that the likelihood of being off work for a period of time is far higher than people think.
Nearly two million are off work due to accident/illness for more than a month every year), and many of the reasons people have for not taking it are actually misguided.
Ironically, financial advisers aren’t immune from this effect either, with just one in 10 advisers holding their own IP policy.
It’s common for clients to believe that they will never have a need for IP, but unfortunately no one is immune to illness or accidents.At LV=, we know it can be tough to persuade clients to take out IP when they’re under the illusion that they’re invincible or will ‘get by’, yet we believe more can and should be done to help more people become more financially resilient.
That’s why we decided to look into some of the most common reasons people cite for not taking out IP and examine how valid they are.
1. It is too expensive
While IP is often more expensive than life or critical illness cover, there is a good reason for that - the risk of falling ill and being off work for an extended period is much higher than suffering a serious illness or dying during working life.
That being said, IP can be much more affordable than you think and there are many ways the cost can be brought down.
For example, ‘budget’ Income Protection which will pay any individual claim for up to two years, is less than half the cost of full IP, with premiums as little as £10 a month.
Alternatively, shaping the amount of cover to protect specific debts or essential costs, or reducing the term of the policy to cover peak financial commitments, such as until end of education for children, can make IP more affordable.
2. I’m young, fit and healthy
It’s common for clients to believe that they will never have a need for IP, but unfortunately no one is immune to illness or accidents.
The LV= Risk Reality Calculator is a simple, quick online tool advisers are using to show clients the likelihood of them being off work long-term sick during their working life. And the younger the client is, the cheaper the premium; it pays to start young.
3. My family will look after me
It’s common for people to assume family will help out if they weren’t able to work. However, the reality is that although family members might be able to afford to for a short while, for most people it’s likely to put strain on them too.
Recent LV= research reveals one in five people are worried about their partner not being able to work because of sickness or accident in the next year.
4. I have a pre-existing condition
IP is still worth considering for clients who have a pre-existing condition, as a different illness or injury could still stop them working and earning in the future.
A number of tools are available to advisers to explore how providers might cater for a client with more common conditions.
The LV= Pre-Underwriting Tool gives an instant decision about how one or combination of thousands of conditions will result in standard rates, a premium loading or exclusion, require more medical evidence or in rare cases result in a decline.
All this can be done upfront without having to submit an application. It’s important too though for advisers to encourage their clients to actively and fully disclose; nobody wants a claim not to pay out, when it’s needed it most.
5. My employer will support me
Surprisingly, over 10m households would be entitled to little or no state support if the breadwinner was unable to work. For the employed, standard Statutory Sick Pay is currently just £89.35 per week for up to 28 weeks.
But with the average monthly mortgage payment at £666 and the average monthly rental payment at £722, people may be surprised that even if they are entitled to receive Statutory Sick Pay, it may not be enough to cover their basic outgoings.
In fact, the average family spends around £57 a week on food alone.
6. I can’t get cover because I’m self-employed
Recent LV= research revealed more than four in ten self-employed mistakenly believe they’re not eligible for IP. With self-employed continuing to rise – and heading towards five million – IP can play a part in safeguarding them too.
At LV= for example, we cover up to 60 per cent of net profit for the self-employed. We also understand income can fluctuate, so we’ll look at the last three years of a client’s income when working out the maximum benefit payable at claim.
We also have a specialist product - Personal Sick Pay - that’s tailored to clients in riskier jobs who can be more expensive to insure, such as tradespeople, nurses, electricians and construction workers.
7. When I need it, it won’t pay out
In the vast majority of cases IP claims are paid out, at LV= we paid out nine in ten IP claims last year. We know that at the point of making a claim, clients are likely to be under emotional and financial pressure.
This is why some insurers will offer a dedicated case manager who supports them throughout their claim, liaises with our rehabilitation experts and services and, importantly, offers a caring ear.
Ideally protecting income should feature in every protection conversation, with advisers emphasising its importance to financial security and the valuable role IP plays – including added value services such as early intervention, rehab and back to work support.
Justin Harper is head of protection policy at LV=
