IP policies, which provide people with an income if they become too sick or injured to work, are often arranged with an expiry date — typically the age the client expects to retire or the state pension age.
But the state pension age is increasing for both men and women to reach 66 by October 2020 before rising to 67 by 2028 through a gradual process.
For customers who took out a policy expecting to retire earlier than the age they will now retire at, they could face a gap in their protection.
In the worst case scenarios women who expected to retire at 60 but are now unable to retire or draw their state pension until they are 67 will see a seven year shortfall.
The first people to draw their pension at age 67 will be those born in 1961.
The government first announced its intention to raise the women state pension age from 60 to 65 in 1995. This started to come into effect in April 2010. By November 6, 2018 the state pension had been equalised for men and women at age 65.
Clients who have remained in a similar state of health since buying the policy may be able to extend their policy or take out a new, similarly priced plan to cover them for the missing years.
However, those with deteriorating health may not be able to get cover or afford a new policy and anyone already claiming will be unable to extend their policy.
Kevin Carr, chief executive of the Protection Review, said: "Many people have taken — or may have been advised to take — an income protection policy to tie in with their intended retirement age.
"But the changes mean that by the time some policyholders reach that age, there could now be a shortfall."
He added: "If advisers haven’t already contacted IP customers it is worth doing so. While healthy clients can amend their policy, those who now have a medical condition or anyone who is already claiming could be caught out."
Alan Lakey, director at Highclere Financial, said the problem was advisers had to make a guess at the outset.
He said: "Naturally, advisers suggest 25 years of protection if the client is most likely going to retire in 25 years' time.
"It’s one of these occurrences where there’s no one to blame and I’m not sure there’s much advisers can do except talk to their clients."
Mr Lakey said insurers should write to any client whose policy will create a gap to let them know there may be a shortfall in their policy.
He added: "I really think the onus is on the insurer because they will have many clients who do not have an adviser. There’s no easy solution, but they are in the best position to resolve it."
Product strategist at British Friendly, Emma Thomson, said insurance policies needed to become more flexible.
She said: "While the recent retirement age increase is having an effect now, this won’t be the last time this kind of thing happens.
"You just do not know what may happen and these are long-term contracts so there does need to be some reflection on the way the product works."
One possible solution to avoid a similar problem in the future, suggested by Ms Thomson, was to include pension age hikes in guaranteed insurability options.
Guaranteed insurability options allow customers to increase their cover if they’ve had a significant life change — moving house or having a baby — without further underwriting.
If pension age increases were included in such options, it would help consumers protect against such a shortfall.
She said while British Friendly wanted to help those currently caught short — which were a limited number of members — the company couldn’t simply extend cover as it would penalise other members on their book.
"We have a responsibility to the people who already have a policy with us and any potential future members.
"But we are looking to see what we can do and plan to write to all those who may be affected."
imogen.tew@ft.com
