The principal barriers to sales of income protection insurance (IP) are that clients are more interested in life and critical illness cover, and that IP is perceived to be too expensive.
This is according to the latest research done among advisers by Defaqto.
Previous studies had shown that, of all the main protection products, IP is sold least and we wanted to understand why this is the case. We offered the respondents nine broad reasons to choose from with the option to add reasons of their own (other).
There were 848 responses, on average 2.9 reasons per respondent, and the results are set out in the following table:
Table 1: Previous studies have shown that of all the main protection products, income protection is sold least, why do you think this is?
|Financial underwriting is too complicated||27|
|Clients don't think it will pay out when they need to claim||69|
|It is too expensive||71|
|Clients think state benefits will be sufficient if they were unable to work long-term||80|
|Advisers don't focus on it as much as other protection policies||92|
|Clients don't think they will ever need to claim for sickness or disability||95|
|Clients think their employer will cover them||106|
|It is perceived to be too expensive||148|
|Client are more interested in life and/or critical illness cover and can't afford both||150|
Source: Defaqto Limited, Life & Protection Service Study 2017.
Given the low level of financial literacy among the population in general, the strong response to this option begs the question: ‘How do they know which cover they should have?’
A product-driven approach that assumes life and critical illness cover addresses most people’s protection needs, may not deliver the most effective solution. Establishing a hierarchy of needs for protection within the adviser firm maintains a consistent proposition and helps individual advisers frame their recommendations.
The following table sets out an example of a hierarchy of needs for protection advice.
Table 2: Hierarchy of needs
|Priority 1||Priority 2||Priority 3||Other options|
|Single||IP to protect income if you cannot work||CIC to provide a lump sum in case of serious illness||PMI to provide prompt medical treatment if ill||Whole of life to cover funeral costs|
|Single||Life assurance for debt protection and IP protect income||CIC to provide a lump sum in case of serious illness||Life assurance (FIB) for lifestyle protection for dependants||PMI to provide prompt medical treatment if ill|
|Married/Partnered||Life assurance to protect joint loans/debts||IP to protect income if you cannot work||CIC to provide a lump sum in case of serious illness||Life assurance for lifestyle protection. PMI for prompt medical treatment|
|Married/Partnered||Life assurance to protect joint loans/debts||IP to protect income if you cannot work||CIC to provide a lump sum in case of serious illness||Life assurance (FIB) for lifestyle protection. PMI for prompt medical treatment|
What is most noticeable in this simplified example is that an IP recommendation features as the first or second priority in all four broad scenarios and, in all cases, ahead of critical illness cover. Perhaps advisers need to better articulate the risks that apply to particular client scenarios.
Many disability claims are attributed to musculo-skeletal complaints and mental illness, neither of which are covered by a critical illness policy. Critical illness is therefore often not suitable for protecting clients against being unable to work.
It is perceived to be too expensive
This perception is most likely informed by a comparison with the typical costs of other long term protection products, for example, life and critical illness cover, but this isn’t an easy comparison to make.
Consider a 25 year old male in good health purchasing an income protection policy with a monthly benefit of £1,500 per month until age 68, his retirement age. At current rates this would cost on average just £28 per month.
If, at age 30, he suffered an accident and was unable to work long term, the policy would potentially pay out for 38 years, a total amount of £684,000.
Had he instead purchased life and critical illness cover, assuming modest long term investment rates of 5% per annum, he would need a lump sum benefit in the region of £300,000 to meet this need. At current rates this would cost approximately £76 per month; two and half times more expensive.