Income Protection  

Why income protection is evolving

  • List the common causes of income protection claims.
  • Describe how income protection is evolving beyond the core insurance product.
  • Identify the role of critical illness cover and how to look beyond the claims statistics.
Why income protection is evolving

While sales of protection policies are dominated by term (life) insurance and claim volumes are skewed by the high number of non-underwritten ‘over 50s’ plans, this article casts the spotlight on ‘protection for the living’ – individual income protection (IP).

More and more advisers are recognising the importance of protecting their clients' income and this is why IP sales and, in turn, claims are on the increase.

Every year, over a million people are off work for a month or longer due to illness, so we will look at the causes of people being off work and claiming on their IP policies, and how these differ from critical illness cover.

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The article will also outline how IP is evolving to offer more support beyond the core insurance benefit and how the product name comes in for criticism – even though it is better than the previous label ‘permanent health insurance’.

The big numbers

According to the latest Association of British Insurers (ABI) data, the protection industry paid out over £5.3bn in group and individual claims last year, with an average admittance rate of nearly 98 per cent.

As an industry we helped more than 200,000 individuals and families – and behind each of these statistics is a real person or a family with a unique story.

Income protection

An IP claim is not a one-off payment. Claims can last for years.

At LV, the longest ever claim (and it is still in payment) has run for 32 years, for a member who has since been diagnosed with epilepsy following a stroke. Their payout now totals nearly £300,000.

When reading the headline claim numbers, we should look deeper to understand the true longer term value of IP claims. 

Just under half of the individual IP claims last year were new claims submitted in 2018, with an average acceptance rate for new claims of 90 per cent.

Across the industry £166m of income was paid to all new and existing IP claimants, paying out on average £8,589 per annum, some of whom would have been paid for a part year. Benefits, remember, are paid free of income tax.

The experience for claimants differs across the different types of IP and depends on the product design and the target market.

In fact there are now so many IP variants that it makes it difficult to generalise. 

It might seem a bit old-fashioned but the easiest way to group the types of IP is by those aimed at people who have ‘white collar’ occupations and those in ‘blue collar’ jobs.

What I class as white collar IP is typically offered by mainstream insurers – for example, Aviva, LV, L&G and Royal London – with pricing based on the individual’s occupation, (usually split into four broad occupation rate classes), guaranteed premiums which are level across the full policy term, and longer deferred periods before policyholders are eligible for their first claim.