ProtectionJul 20 2017

What is better, long-term or short-term protection?

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What is better, long-term or short-term protection?

According to proponents of lifestyle insurance, short-term protection can be very useful for lower earners, young people, renters and those who are brand new to protection and cautious about insurance products.

Those who advocate long-term protection products extol the wider scope of the cover, the potential for more comprehensive insurance and the ability to protect themselves up to the age of retirement.

According to Raluca Boroianu-Omura, head of health and protection for the Association of British Insurers, the main issue is to get some form of protection.

It is clear if someone can afford full income protection, the overall level of cover is more comprehensive. Peter Hamilton

She says: "The protection gap in the UK is one of the largest in Europe. Millions of households could be left seriously exposed if the main earner were unable to work, and the family forced to rely on state benefits to get by."

For her, giving the consumer a choice of protection is paramount. "A number of affordable protection products are available, which allow individuals to protect their income in the event they are unable to work for health reasons.

"Some of these are longer-term products which run for many years, and are underwritten at the outset.

"Others are short term, may not be underwritten, but which may contain exclusions at point of claim."

Long-term protection

A longer term plan that covers an individual's income up to the age of retirement has the advantage of its longevity. Consumers know what their premium is, what their expected level of cover would be, and what conditions are covered.

For example, long-term income protection plans tend to cover serious progressive conditions such as MS and motor neurone disease.

It also covers debilitating strokes and heart attacks, where the ability to work is permanently ended. Such conditions and illnesses are not usually covered by short-term insurance products.

Alan Lakey, founder of the CI Expert, comments: "Unsurprisingly, a policy paying income potentially up to retirement age will cost more than a short-term plan.

"Insurers have determined it increases the potential payout and this should guide consumers that proper cover costs more, and is worth paying for."

Long-term IP features at-a-glance

  • More conditions covered.
  • More costly.
  • Greater certainty over premium.
  • Increased potential payout.
  • Cover until retirement.
  • Underwritten.

"At the end of the day," says Paul Reed, co-founder of Vita, "some cover is better than no cover, but there are wider options out there. 

"We would always look to get a long-term plan in place for a customer, but if budget restricts or the information is not there, then the client may well lean towards a cheaper product. We think you get what you pay for."

Short-term income protection

Short-term income protection also has its advantages, not least because it is as flexible as the individual's lifestyle and situation.

Says Emma Thomson, life office relationship director for Lifesearch: "A short-term product makes sense to offer, especially for those people who have never bought insurance before, such as millennials."

Generally, lifestyle/short-term income protection policies will cover a percentage of your client's monthly pay.

This could be enough to cover their mortgage or rent payments or any other debt repayments they might have and enough to ensure they can live comfortably if unable to work.

While some short-term income protection products are underwritten, many others are not - which can help to speed up the application and acceptance process.

This adds to the flexibility of such cover, which can be attractive to clients. Andrew Sajo, spokesman for The Source (formerly its head of strategic relationships), says: "The flexibility of short-term contracts suits fluctuating commitments and incomes.

"There is the added flexibility of limited intrusive underwriting, due to the term."

He also advocates simple, common policy wording that can accommodate income, mortgage and rent under one contract, which he says will help to reduce fear of mis-selling.

Then there is the level of cover. With most short-term policies, the majority of - not the whole of - the individual's gross monthly salary is actually covered.

This product sits best with IFAs who can ensure the level of cover is appropriate to the customers' changing commitments and income. Andy Coles

For example, Covea's short-term income protection plan can provide cover of up to £2,000 per month or 60 per cent of the client's gross monthly salary.

However, while injuries such as a broken leg or short-term illnesses will be covered, there are generally several conditions excluded, such as more serious illnesses like debilitating strokes.

Moreover, generally they contain an exclusion clause in relation to pre-existing conditions. But as the Financial Ombudsman Service has warned, the way in which exclusions are framed vary from policy to policy where no detailed underwriting has taken place.

A claim could be turned down if the consumer suffers from a pre-existing condition they ought reasonably to have been aware of.

As its website states: "This means that even if the consumer has had no medication - and has seen no doctors - in the specified period, the insurer may still try to exclude the claim, if it considers that the consumer suffers from a pre-existing condition that they ought reasonably to have been aware of."

So it is worth making sure the consumer knows what they are likely to be covered for.

Short-term at a glance

  • More flexible.
  • Cheaper.
  • Not generally underwritten.
  • Good 'starter' protection product.
  • More conditions excluded.
  • Less certainty of premium renewal.

Apples and oranges?

But is this really a case of comparing apples and oranges, or is there a more nuanced view?

For Mr Lakey, it is really up to the customer's needs.

He opines: "The consumer mindset determines whether they will opt for comprehensive cover or a budget plan."

In agreement is Peter Hamilton, head of retail propositions for Zurich: "It inevitably depends on personal circumstances and budget. The shorter-term plans are cheaper and simpler, but it is clear that if someone can afford full income protection, the overall level of cover is more comprehensive."

Ms Thomson believes a hybrid approach could work best: "A more comprehensive option that specifically covers rent and/or mortgage payments would appeal to consumers who have more time to get advice, or have health conditions that need to be covered.

"I think this type of product would be good for our market and there is scope to design different options to meet differing needs."

But as always, the adviser's role in determining what is best for the consumer is a vital one. Ms Boroianu-Omura adds: "The ABI would always encourage consumers to seek financial advice before purchasing any income protection product, to ensure they get the appropriate cover for their needs."

This is becoming all the more important, as according to Andy Coles, development director for Lutine Insurance, the aggregators are becoming the "fly in the ointment" with short-term protection, as they are taking up to 40 per cent commission to "roll to the customers at renewal".

He adds: "This product sits best with IFAs who can ensure the level of cover is appropriate to the customers' changing commitments and income, rather than screwing the price to the floor on a non-advised basis."

simoney.kyriakou@ft.com