Life InsuranceOct 27 2016

Spotlight: Tapping the self-employed market

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Spotlight: Tapping the self-employed market

The self-employed: Take-up of protection is lower than average among those who are self-employed. Sam Barrett looks at how advisers can reach this market.

Changing economic times have resulted in an increase in the number of people setting up their own businesses, with government figures showing a rise from 3.80 million self-employed people in 2008 to 4.79 million in 2016. But while these individuals are prepared to run their own firms, they are less likely than their employed peers to take out protection.

Figures from Scottish Widows show that although the self-employed are slightly ahead when it comes to life insurance, with 34 per cent taking out cover compared with 32 per cent of the general population, penetration drops on other protection products. For example, while nine per cent of the general population have critical illness insurance, this falls back to just seven per cent of the self-employed population.

Protection gap

This may seem a small gap, but Johnny Timpson, protection specialist at Scottish Widows, says the dynamics of the self-employed market mean the disparity is concerning. 

“Nearly two-thirds (62 per cent) of self-employed people’s families are reliant on one wage earner’s income compared with just over half (52 per cent) of the average population,” Mr Timpson explains. 

“But although many would struggle financially, more than four million self-employed people do not have protection in place if they were unable to work due to illness.” 

For example, when Scottish Widows asked about the consequences of losing their main income, 21 per cent of self-employed people said they would not be financially secure, and 12 per cent said they did not know how long they would be able to pay the household bills. One in 10 even said they would not make it to the end of the month.

As few of us relish being on this financial precipice, this low take-up has to be down to a lack of awareness. Without an employer to point out these products, protection is unlikely to feature on a self-employed person’s list of priorities. 

“People think it would not happen to them and, if it did, the state would look after them,” says Chris McNab, head of protection proposition at LV=. “And even when a self-employed person is aware of protection, there is a perception that it is expensive.”

This perception is understandable. A self-employed person looking to replicate the protection benefits a former employer provided would find them much more expensive, especially if they plumped for the comprehensive versions. 

Income issues 

As well as a lack of engagement, the characteristics of this group can also present protection problems. Although high financial underwriting limits on life insurance and critical illness insurance mean there are few issues around taking out sufficient cover, self-employed people can face complications when it comes to income protection.

Jennifer Gilchrist, senior product development manager at Royal London, explains: “It is easier to take out cover now as a lot of the upfront financial verification has been dropped

“However, many self-employed people have variable income and might want to adjust their benefit level so they are not paying for more cover than they would be able to claim.”

Additionally, where a self-employed person takes a large part of their income as a dividend rather than salary, this can be problematic. For instance, to address this, Royal London uses a different income definition for the self-employed. 

This states that for self-employed people, income is regarded as their pre-tax profit from their trade profession for the purposes of Part 2 of the Income Tax (Trading and Other Income) Act 2005 for the 12 months before they became incapacitated. And where this varies significantly from one year to another, it uses their average earnings over the last three years.

Product solutions

Insurers have sought to address the issues with variable incomes with the launch of products such as The Exeter’s Bills & Things and LV’s Personal Sick Pay. Rather than pinning benefits to income, these allow policyholders to select the benefit level they need. 

As an example, on The Exeter’s product, policyholders can select a benefit level from £500 to £1,000 a month for a payment term of one or two years. 

Similarly, LV’s policyholders can take out up to £8,333 of benefit a month, with the first £1,000 of this guaranteed for the first two years of a claim as long as they can show they normally work at least 30 hours a week.

Another product that scores highly with self-employed people is day-one cover, which ensures that if they are unable to work, benefit will be paid immediately. Again, the friendly societies have specialised in this area, although this has helped to bring down deferred periods across the market.

More could be done, too. Karin Lloyd, independent claims and underwriting specialist, and a member of the executive committee of the Income Protection Task Force, explains: “There is a need for some sort of pooling arrangement for many of these people as the perceived risks make cover too expensive for them individually. 

“There have been embryonic movements towards self-organising risk groups who then look for cover and maybe there could be further development in this area.”

For example, these groups could be set up by trade associations or organised by advisers who deal with large groups of self-employed people. 

Raising awareness 

However, before developing more products for this market, there is also a pressing need to increase awareness of the importance of protection. Ms Lloyd says the self-employed are subject to exactly the same lack of awareness of protection needs and potential solutions as everyone else. “I hope the industry comes together again to build on the efforts of Seven Families to bridge this gap,” she adds. 

This campaign, which provided financial and rehabilitation support to seven families, finished in July 2016. Securing more than 750 pieces of media coverage, it was widely heralded as a successful first step in raising awareness, especially among advisers.

Many echo Lloyd’s view and would like to see the industry continue this work, with some looking to the US for inspiration. There, insurers work together on a number of campaigns to raise consumer awareness of the need for different types of protection products. For example May is Disability Insurance Awareness Month, September is set aside for Life Insurance Awareness Month and November is Long-Term Care Awareness Month. 

“It is like Seven Families on steroids,” says Timpson. “All of the insurers support it, producing marketing collateral and tools to help raise awareness. They also incentivise consumers to come forward as case studies. It is very powerful.”

Professional connections

Reaching out to the self-employed market is also essential. Recommending protection when they seek mortgage or pensions advice is a good starting point, with advisers helping to ensure they have the right protection products to fit their needs and budgets.

However, Emma Thomson, life office relationship director at LifeSearch, believes advisers should consider targeting this market more. To achieve this, she recommends building professional connections. 

“The self-employed are much more likely to see an accountant or solicitor than an independent financial adviser, so build relationships with these professionals for referral business,” she explains. 

“It is also sensible to forge links with trade organisations and bodies such as the Federation of Small Businesses.”

Building these connections, coupled with the introduction of further industry-wide campaigns, will help to raise awareness of protection products. After all, with so much at stake if they are unable to work due to illness or injury, ensuring the self-employed are given the opportunity to take out protection is of significant importance.