Income Protection  

Lack of IP flexibility 'worrying' as self-employment grows

Lack of IP flexibility 'worrying' as self-employment grows

Advisers have said the lack of flexibility in income protection is "worrying" as the number of people in self-employment grows.

The number of self-employed workers has risen dramatically in recent decades - from 8 per cent in 1975 to 14 per cent in 2019.

This has raised concerns that volatility in income will become ever harder to protect under insurers’ current policy terms.

“Unfortunately, IP policies are not as flexible as you might hope,” Roy McLoughlin, associate director at Cavendish Ware, told FTAdviser.

“It’s very difficult to change a sum assured on an income protection policy. And there’s a risk the policy might not pay out - if a freelancer’s earnings dip for a few years, insurers won’t necessarily pay the higher sum assured.”

McLoughlin said insurers were "burying their heads in the sand".

Post-Covid and post-furlough, McLoughlin anticipated more self-employed jobs would be created.

“People are also becoming two-jobbers,” he highlighted. “IP should take this into account. Flexibility in a contract key, but IP terms in place at present are frankly worrying.”

He concluded: “Obviously when increasing a sum assured the insurer will normally want new underwriting but many of us argue a greater amount of flexibility would be welcome. More worrying is when sometimes you want to decrease what you are insured for. You’d think that would be easy. It’s not.”

Jo Miller, co-chair of the Income Protection Taskforce, said income protection products needed to “keep up with the trends” to ensure they don’t prevent customers from reaping the benefit of them.

“A steady monthly income is increasingly becoming a rare occurrence as more people become self-employed and embrace portfolio careers,” she explained.

“It’s important that protection products, including income protection, keep up with the trends that we’re seeing so that we don’t exclude potential customers.”

Elizabeth Mackenzie, an independent adviser at Grange Financial Planning, told FTAdviser the issue also affected other clients.

She said she had a client in their 50s whose IP policy expired within five years but was unable to make changes to the sum assured despite a salary increase.

“No company will write a new contract for less than five years for anyone,” said Mackenzie. “But they’re also not willing to amend a contract that has been funded faithfully hereto. It seems pretty awful since these are the most risky years of cover.”

LV, the insurer which issued this policy told FTAdviser: “The fact that the IP policy is 20 years old means that it may be an existing policy that we took over in 2001. One possibility is that the client may have breached the age limit for guaranteed increase options.”

It continued: “All providers have some limits, as increases at older ages will present a disproportionate increase of insurance risk (and of claim) not factored into the original premium assumptions.”