With its ability to cover an individual’s monthly expenditure, income protection is often regarded as the most important protection product.
But while the insurance industry has been saying as much for many years, proposals included in a recent government green paper suggest policymakers are keen to see more people benefit from this form of cover.
The green paper, Work, health and disability: improving lives, was published at the beginning of November by the Department for Work and Pensions and the Department of Health. It seeks views on how to enable more people with disabilities to find or retain employment.
Currently, 80 per cent of the non-disabled population is in work, but this figure falls to just 48 per cent among people with disabilities or long-term health conditions.
Under review
As part of proposals aimed at achieving this goal, the government is looking to review statutory sick pay and GP fit notes, and launching a consultation on reforming the Work Capability Assessment. It also believes income protection has an important role to play.
To support this, the green paper cites research by the Centre for Economics and Business Research. This shows that, where employees have access to the early intervention and rehabilitation available under income protection, long-term absence is on average 16.6 per cent lower than among employees who do not have this cover.
However, the government also recognises that take-up of income protection is still low, with just 7 to 8 per cent of the working population having cover. Given the benefit it delivers to employers and employees alike, the paper suggests that cost and a lack of awareness lie behind this low penetration rate, and asks for ideas on how to encourage more people to take out cover.
As well as looking for ways to increase take-up among larger employers, the government also wants to see smaller companies – which account for 36 per cent of the UK workforce – taking out cover. It suggests developing products that are more tailored to their needs, such as some form of collective purchasing model to make cover more affordable.
Unsurprisingly, the green paper has been welcomed by the protection industry.
Peter Le Beau, chairman of the Income Protection Task Force (IPTF), says: “It is really encouraging that the government is taking such a positive approach to the role that income protection could play. We talked to them during the planning process and we welcome the dialogue and opportunities it will bring.”
Financial incentives
One issue that is certain to feature in this dialogue is the use of incentives to encourage more take-up. Several different models have already been discussed in the industry, including tax breaks and a form of auto-enrolment for income protection, but the approach that is gaining most support is a reduction in national insurance for employers taking out cover.
As an example, Unum’s head of public affairs, John Letizia, says his firm believes a £30 reduction in employer national insurance on a policy that typically cost between £250 and £300 a year for an employee would be a sufficient incentive to lead to greater take-up.
“This could be targeted at the SME sector to encourage them to take out cover and would also help to extend cover to lower paid employees,” Mr Letizia explains.
“Some insurers would like to see this offered on a permanent basis, but we believe that by offering it for a year or two it would give us sufficient opportunity to broaden the market. Few employers remove this benefit once it is in place.”
Offering this type of incentive could be cost-neutral to the government. Increasing the number of people with cover would lead to a reduction in the benefits bill for people unable to work due to illness or injury. The government would collect more tax, either on income protection claim payments or on employees’ salaries, where they are able to stay in work or return to work due to the support provided by the insurance policy.
Awareness campaign
While there is support for a cut in national insurance for those taking out cover, not everyone believes it is necessary. Roy McLoughlin, a partner at Master Adviser, and a member of the IPTF executive, believes an awareness campaign is the key to driving take-up. “The Seven Families campaign, which saw five of the seven individuals return to work, really helped to raise awareness among advisers. We need to build on this so that we reach both employers and employees.”
As part of this, Mr McLoughlin is in favour of employers being encouraged to produce a statement for employees that outlines what they would receive if they were unable to work due to illness or injury. This would set out the company’s sick pay arrangements, including income protection benefits, and details of what they would receive from the state. This awareness would encourage employees to understand the risks and make some provision, while also nudging employers to take out cover.
Another aspect of the product that many feel is undersold is the rehabilitation support. Nick Homer, propositions manager for corporate risk at Zurich, says early intervention can enable some employees to return to work before the end of the deferred period.
“These cases can be invisible as they never become financial claims, but we do need to do more to raise awareness of it. In the Seven Families campaign, many of the families thought it was more valuable than the financial support,” Mr Homer says.
Additional awareness campaigns are on the IPTF agenda for 2017. These include a webinar programme for advisers, and a new website that would serve as a repository for technical information. The task force is considering running an awareness week inspired by the disability awareness months held in the US.
Cost confusion
Another important strand that needs to be worked into any awareness campaign is addressing the misconceptions around the cost of income protection. As mentioned in the green paper, this is often regarded as an obstacle to taking it out. But, although some employers will struggle to afford the £250 to £450 a year for each employee that is outlined in the paper, research has found that many are put off because they believe the costs to be far higher.
For example, according to research carried out among 501 UK businesses in September 2015 by Group Risk Development, although typical costs are less than 1 per cent of payroll, with limited term products coming in at under 0.5 per cent, 60 per cent of employers believe it will cost more, with 9 per cent putting the cost at 10 per cent or more.
The issue of value is also likely to be up for discussion, especially for individual income protection and its relationship with Universal Credit.
Richard Walsh, fellow at Sami Consulting, explains: “Anyone who receives a claim payment from an individual income protection policy could see their benefits clawed back on a pound for pound basis. The government needs to work with insurers to ensure those who act responsibly are encouraged rather than penalised.”
While there are plenty of areas that will need to be discussed to ensure income protection can support the government’s ambition to halve the disability employment gap, the industry is very optimistic that this heralds a larger role for the product. By seizing this opportunity, income protection could achieve the market penetration that many believe it deserves.
