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.”
Insurers protecting profits
Alan Lakey, director of CIExpert, said he was “all for greater flexibility”. He added: “It can allow somebody to retain a valuable product that otherwise might have to be cancelled.”
Lakey said insurers’ resistance to last minute income protection policy changes might be that they don’t represent value for money from their perspective.
“Or it could be that some insurers don’t want the initial cost of what appears to be a small top up with limited profitability,” he added.
Alan Knowles, managing director at Cura Financial services, said: “Most providers include the option to increase the cover without further underwriting as long as it's applied for within a set period from the pay increase.”
To do this, clients need proof of the salary or mortgage increase. “The challenge is getting it within the 3-6 months of the event which is the normal limit. Some have the cap where you can't do this in the last five years, but not all.”
There will always be risk
Peter Hamilton, Zurich’s market engagement head who was recently appointed by the government to oversee the insurance sector’s disability and accessibility work, said one of the challenges facing insurers was the extent to which their systems were modern enough to handle flexibility in policies.
“It differs between insurance companies. Zurich has a more modern system, so you can change the monthly benefit and the amount of income which is insured. But some changes require underwriting if the risk is increasing.”
Hamilton used the example of someone with a damaged spine who has a greater chance of being off work. “You can decrease very easily, but increasing is where the risk comes in.”
“Whilst here at Zurich we’ve fixed the systems piece, risk will always be there. That’s why we don’t sell IP directly to consumers. It needs an adviser,” said Hamilton.
He admitted “there will be some older products on the market where system constraints may make it harder to change elements such as the benefit amount, the term of the plan or the deferred period”.
In the future, Hamilton said he could conceive of a plan - once more of the UK has taken up open banking - which automatically changed as earnings change.
ruby.hinchliffe@ft.com