Research by Sainsbury’s Bank found that while 41 per cent of homeowners have life insurance or critical illness cover, just 26 per cent of those renting have a policy. Richard Walsh, fellow at Sami Consulting and co-chair of the Building Resilient Households Group, says the situation is similarly problematic for income protection.
“Anecdotal evidence suggests that only around 6.5 per cent of income protection policyholders are in rented accommodation,” he explains. “This leaves many households dependent on their savings if they are unable to work due to long-term illness.”
In need of a safety net
Universal credit is available to individuals unable to pay the rent themselves due to illness or the death of a partner. However, as the amount someone receives is determined by their income and savings, how many people they live with and the Local Housing Allowance rate, there is no guarantee the benefit will cover the rent.
Just how unlikely this is was illustrated by research by Shelter. Based on analysis of government figures, it found that as a result of private rents rising faster than the LHA rate, shortfalls are commonplace. The biggest is in Kensington and Chelsea, where a small family with one or two children would be expected to find an additional £1,253 a month, but even outside the capital they could still be looking at an extra £531 of housing costs every month.
Adding further weight to the need for protection, a recent report from letting platform Howsy demonstrates how dependent renters are on their income. It found that, on average, 34 per cent of the average salary is spent on rent in the UK, with this figure climbing to 65 per cent for those renting in the capital. Hackney takes top spot, with tenants in the borough spending an average of 83 per cent of their salary on rent.
Given that the English Housing Survey found owner-occupiers spent an average of 19 per cent of their income on mortgage payments, there is clearly a pressing need for renters to consider protection. As well as a potentially larger liability, private landlords may not be quite so sympathetic as lenders when it comes to negotiating a mortgage holiday.
Breaking down barriers
Although their homes are potentially more at risk in the event of long-term illness or death, it is easy to see why renters are failing to take out protection: with most protection sold on the back of a mortgage, they are simply not exposed to the protection conversation.
Ben Heffer, insight consultant for life and protection at Defaqto, says: “Renters tend to fall through the gaps a bit. A significant number of people rent their homes but the focus for financial needs tends to be on the mortgage.”
The situation is exacerbated by the language used in protection literature, where the importance of protecting the home and mortgage is a common message. Although these policies are just as suitable for someone in private rented accommodation, this bias is serving to exclude them.
Legal & General is seeking to address this with the launch of its Rental Protection Plan. This is made up of three elements: an income protection benefit, life insurance, and life insurance with critical illness cover, with all three available through a single application.
“Existing products are suitable for people in the private rented sector, but we wanted to help advisers make protection more relevant to them by creating a plan especially for them,” explains Craig Brown, director of L&G Intermediary.
As well as being marketed for the private rental market, the plan also includes features that are particularly relevant to renters. Alongside the standard guaranteed insurability options, policyholders can increase cover without the need for further underwriting if they move into a more expensive rental property or their landlord puts up the rent.
Policyholders can use this option a maximum of three times for each of the products and there are limits on the increase that is available without further underwriting. For example, on the income protection element, the maximum increase is 50 per cent of the original monthly benefit, subject to a maximum of £833 a month.
Building momentum
To test the suitability of the plan, L&G ran a three-month pilot with the Mortgage Advice Bureau. Ben Thompson, group managing director at the latter, says it was good to have a product specifically for the rental market. “It really helped us to target this market,” he explains. “Protection is just as relevant for tenants, if not more so.”
Following on from this success, L&G is now rolling the plan out to other advisers. Mr Brown expects the product design will evolve as more experience is gained. As an example, he is already exploring how to make the plan more portable if someone moves from the rental sector to home ownership.
Creating a product specifically for the rental market is a helpful first step, but the industry is also looking at the other obstacles that stand in the way. In spite of the shortfalls that exist in the benefit system, individuals can be deterred from taking out their own protection because it may reduce their benefits if they subsequently need to claim.
To address this, Mr Walsh would like to see the disregard of insurance payments that is in place for mortgages extended to cover all housing costs. Through the Building Resilient Households Group, he is currently making a case for this with the Department for Work and Pensions and the Ministry of Housing, Communities and Local Government.
“Extending the disregard for all housing costs would make things a lot simpler and encourage people in the private rented sector to take out protection,” he explains.
Targeting tenants
With this obstacle removed, more insurers are likely to follow L&G’s lead. However, Maxine Udall, marketing and research manager at Swiss Re, believes the protection industry will need to overcome a further obstacle. “Distribution is the biggest challenge,” she explains. “Insurers and advisers need to find ways to get in front of this group.”
For the Mortgage Advice Bureau, existing relationships with estate agents proved particularly useful during the L&G pilot. Where these agents also have letting functions, it is worth forging relationships to promote protection to tenants.
As well as growth in this market, changes in legislation may help to increase appetite among letting agents. The Tenant Fees Act came into force in May 2019, outlawing some letting agent fees for tenants. While some of these costs will have shifted to the landlord, some letting agents will be looking for other revenue opportunities.
Greater take-up of protection by tenants is also in landlords’ interests, reducing the risk of rent arrears due to a benefit shortfall or lack of savings. Leveraging this angle could also prove fruitful for advisers and insurers.
The Mortgage Advice Bureau also had success targeting future first-time buyers, including protection alongside mortgage affordability advice. “There are a lot of 35 to 44-year-olds renting who want to get on the property ladder,” explains Mr Thompson. “They often have kids, so protection is essential.”
Ensuring individuals in the private rental sector have access to protection advice is essential. And, as more insurers launch products tailored to the needs of those in rented accommodation, meeting their requirements will become easier.
