Need for income protection

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Need for income protection

Reduced welfare spending, an ageing population and increasing financial insecurity among Britons makes it necessary for some form of income protection.

Clients who think the worst will not happen may not be financially prepared for it when it does, either because they have not taken out individual income protection (IP) or taken advantage of whatever group income protection (GIP) their employers offer.

But for those in work, Andy Simmons, senior income protection specialist at VitalityLife, calls it: "Probably the most important protection product to buy.

"The retreat of the welfare state makes it very important to have a safety net in place. The state may provide the bare minimum to survive, but to maintain their lifestyle, clients need their own policy, especially if they are self-employed."

Compound the lack of insurance with a lack of savings, and it is clear there is a need for proper financial protection.

The only way people can be sure of looking after themselves financially in the event of incapacity is by having the right cover in place.Jeff Woods

Katharine Moxham, spokesman for Group Risk Development, comments: "Latest findings from the Money Advice Service highlight 21 million UK adults do not have even modest savings of £500 to replace a fridge or mend a car. 

"Three-quarters of these do not have a savings buffer equal to three months' salary. On top of this, working-age people often overestimate how much the state will support them and their family in the event of ill health or disability."

Problems for individuals

As Nick Homer, group protection manager for corporate propositions at Zurich, says: "Low take-up of income protection presents a real and growing challenge in the UK to individuals and their families, for employers and the government."

His comments have been borne out in a report in October 2016, produced jointly by the Chartered Insurance Institute (CII) and the Income Protection Task Force.

According to the 37-page report, Building Resilient Households, one million people in the UK suffer a prolonged absence from work due to sickness each year but only one in every 10 have some form of insurance.

As a result, the report stated: "Many families suffer financial hardship and lasting damage when there is a prolonged absence from work due to sickness."

Moreover, the report found there were several factors that could exacerbate the financial hardship of being out of work due to illness, all the while the mortgage, bills, household expenses, school fees and other associated costs of living have to be met each month.

Findings from the report included the following:

  • Most people have to rely initially on Statutory Sick Pay (SSP) of £88 a week. SSP is not available to the self-employed.
  • Up to half a million would find their savings run out after just a few weeks.
  • State benefits assist some people but often the payments aren’t enough to help them meet inescapable commitments.
  • Household resources are strained. Rising housing costs, ‘generation rent’, student loans, auto-enrolment into pensions and reliance on the ‘Bank of Mum & Dad’ mean household budgets are likely to remain under pressure for most families.

Iain Clark, distribution and marketing director for British Friendly, one of the co-sponsors of the report, says: "This illustrates the crucial role income protection plays in protecting people, as well as the major potential the income protection market offers to advisers."

State disability benefits

For advisers who do not advise on protection, believing the state will provide for their clients should the worst happen is wrong.

Paul Avis, marketing director of Canada Life Group Insurance, highlights a series of changes to benefits made under the current and previous government which will severely curtail the scope of state benefits.

1) Universal Credit

Under the new Universal Credit regime, 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.

As part of the move to Universal Credit, from 6 April this year, applicants for ESA assessed as unfit for work but capable of some work-related activity will receive a lower level of state benefit, equivalent to the jobseekers' allowance.

"This means the value will fall from £5,312 to £3,801 a year", says Mr Avis. "Can anyone really live on this? Assuming not, then income protection - group income protection - could be the most important benefit any employer will purchase on behalf of its employees."

2) Benefit cap

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.

3) Support for mortgage interest

This used to be a significant benefit, as it allowed people to meet interest payments on their mortgage, but this is soon to be switched off.

In April 2018, the new support for mortgage interest (SMI) payments will not be a benefit but will be paid as 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.

The interest rate is based on the Office of Budget Responsibility rate of 3.12 per cent, not the Bank of England base rate, which is currently 0.25 per cent.

Group income protection is currently means-tested against housing benefit.

After April 2018, housing benefit will not be paid if individuals have group income protection - so it is worth making sure your clients have the best possible group and individual cover possible to protect them.

As Mr Avis points out: "In simple terms, protecting income is more necessary than ever."

With regard to group income protection, he comments: "Employee's mortgages may not be paid, they will be expected to live on £3,801 a year and, even if they do qualify, their quality of life will diminish due to the financial impact of such large reductions.

"And if they have savings of £16,000 or more, they will receive nothing from the state."

Given the scale of these benefit cuts, British Friendly's Mr Clark adds: "Bearing in mind the average household weekly expenditure is £531.30 we believe IP has never been as relevant or as important for advisers to raise in their discussions with clients."

Social challenge

The low take-up of income protection represents a significant challenge not just to the individual, therefore, but also to society at large, with the government seeking to reduce the burden on the state.

According to figures from Royal London, the average 30-year-old, retiring at 65, has a 38 per cent chance of being off work for two months or more. This could seriously affect the cost burden on the taxpayer unless individuals have appropriate cover to protect themselves.

Moreover, with a lack of affordable housing, it is not just homeowners who could be at risk.

Royal London's protection proposition design specialist Jennifer Gilchrist warns the 5.5 million working renters would "be at risk of not being able to pay the rent" because of a lack of financial protection.

"We are seeing the rise of long-term renting and 1.5 million of these have children", she says. "Raising awareness of the benefits of insurance is so important if we are to get more people to understand the consequence of not having a financial safety net in place, should the worst happen.

Jeff Woods, business development director at Sesame Bankhall Group, comments: "The only way people can be sure of looking after themselves financially in the event of incapacity is by having the right cover in place."

simoney.kyriakou@ft.com