Guide to the changing face of income protection
Income protection sales have historically been lower than critical illness and life cover, so what needs to change?
Income protection (IP) has historically not been sold by advisers as much as critical illness cover or life cover.
But many in the protection industry believe it should be the first protection conversation advisers have with clients.
Certainly, a number of recent initiatives by charities and providers have highlighted the numerous benefits of IP, so now the onus is on advisers to ensure their own knowledge is up-to-date and to start those conversations with clients.
Read on to find out more about the barriers facing sales of IP, how advisers can start up the protection conversation and how IP is adapting to meet the needs of self-employed workers.
How income protection sales compare to CI and life cover
Income protection is the “forgotten member of the protection family”, that is, according to Jiten Varsani, independent financial, mortgage and protection planner at HV Financial Planning.
The numbers certainly back this up.
Despite sales of income protection having increased, topping 120,000 last year, Justin Harper, head of marketing at LV, calls it “the poor relative in terms of volumes”. He quotes figures from the Swiss Re Term and Health Watch 2018 report, which shows there were nine times more term sales and critical illness sales in 2017.
Peter Hamilton, Zurich’s head of market management, says its own research suggests that just 11 per cent of the UK population has critical illness cover and fewer have income protection – around 6 per cent – with a further 5 per cent having cover provided by their employers.
“Income protection sales are fewer than life and CI, despite the fact there is a higher likelihood of being off work through illness or injury than being diagnosed with a critical illness or passing away early,” explains Emma Thomson, product strategist at British Friendly.
She points out one reason why life insurance and CI are generally more popular choices is simply down to awareness.
“It’s easier for advisers to recommend life and CI as their clients are more familiar with these products, especially life cover,” she notes.
Across the industry we focus greatly on life and CI cover because that's what we have known for decades.
Historically, advisers have started the protection conversation with clients at the point when they are taking out a mortgage.
Mr Harper says: “Much protection is sold alongside a mortgage.
“Historically, lenders have been more concerned about protecting the loan (in the event of death, for example), rather than the individual.
“Plus, there’s been a heavy focus on affordability to cover mortgage payments at outset, not the resilience of the mortgage holder to continue payments in the event of an income shock.”
Protection providers have also generally pushed critical illness and life cover products more than any IP offerings.
Mr Varsani comments: “Across the industry we focus greatly on life and [CI] cover because that's what we have known for decades.
“There is a huge amount of coverage and marketing over [CI] cover every time a provider either adds new conditions or refines the definition on its critical illness policy.”
Rob Harvey, head of protection advice at Drewberry, agrees that IP gets far less attention.
“Mortgage brokers often highlight the importance of life and [CI] cover when selling mortgages, while adverts for life insurance are ubiquitous across the media.”
Why is this?
He suggests: “Perhaps because [IP] is a more complicated product, with far more ins and outs.
“It's not as easy to have a conversation about or advertise within the confines of a print ad or a short television slot in a way that clients can easily grasp what it is and what it does.”
Mr Hamilton says: “There are various reasons for lower sales of IP – a perception that the product is complicated because of features like deferred periods, as well as integration with employer and state benefits.
“We also know that customers typically overestimate the price.”
Mark Locke, communications director at the Lang Cat, points out: “The complexity exists, primarily, because of the variability of product types."
We are all more likely to be off work due to illness for a prolonged period of time than either dying, or becoming critically ill during a pre-defined term.
“The qualifying criteria for a successful claim is often different from provider to provider. The period when payments kick in also varies, as does the percentage and basis of salary, and the longevity of payment.”
He adds: “There are still also differences between lump sum payouts and regular ‘income replacement’ payouts in terms of state benefits.”
Mr Locke admits all of these variables can make income protection hard to compare and explain to someone who has no knowledge.
Lack of knowledge about what income protection is and how it fits in with other types of protection or insurance is certainly a barrier to wider uptake.
There is also, as some suggest, a belief among advisers’ clients that they are more likely to need CI or life cover than IP.
But, as Mr Locke observes: “We are all more likely to be off work due to illness for a prolonged period of time than either dying, or becoming critically ill during a pre-defined term.”
For this reason, many in the industry believe IP should be the first protection conversation advisers have with clients and that it can be more useful than CI cover.
Mr Varsani believes income protection is far more robust than CI and is, in his view, far simpler to explain.
“There is no need to try to define the various definitions of a heart attack, the varying stages of cancer or loss of one limb versus two. It does what it says on the tin – replaces income when you are ill,” he notes.
“There is the security that the income continues, and can be claimed multiple times through the term of the policy, for as long as you are ill.”
Mr Harvey suggests IP is more “flexible” than CIC in this sense, “because it pays out for anything that medically prevents you from working without it having to be one of the pre-defined 'critical' illnesses laid out by the insurer”.
He continues: “Thanks to the fact that it pays out an income rather than a finite lump sum, the benefit from [IP] can support individuals over the long-term, long after the payout from a critical illness policy may have been used up.”
Placing more importance on IP should help build awareness and, in turn, boost sales of these protection products.
“Out of all of the protection products on the market, IP is the one that should be prioritised among advisers when talking to their customers,” insists Mr Hamilton.
“People underestimate the likelihood of them being unable to work because of illness at some stage in their lives, and having a safety net in place in the event of this happening is crucial.”
What initiatives have launched to encourage IP conversations?
The protection industry has been all too aware of the ‘protection gap’ among advisers for a while, and in the past few years has sought to address this through various initiatives.
Rob Harvey, head of protection advice at Drewberry, observes: “Sales of income protection are slowly starting to rise, but again the factor holding them back is a lack of awareness about the product.
“We all think to insure our homes and cars, but forget to cover what pays for these – our incomes.”
Both 2016 and 2017 saw increases in sales of IP plans year-on-year, points out Emma Thomson, product strategist at British Friendly, citing figures from the Swiss Re Term and Health Watch 2018 report.
She believes there have been many industry initiatives that have contributed to this increase.
One of the most high-profile income protection campaigns was the charity-led Seven Families initiative.
The website explains what its aim was when it launched in 2014: “We aim to highlight the need for people to plan financially in case they become too ill to earn an income and the charity Disability Rights UK are working with seven families where the main breadwinner has been forced out of work by an accident or illness and not received any related insurance pay out.”
“We’ve seen the Seven Families initiative, which has really helped to showcase the value of IP and what an enormous difference it can make to those struggling with illness or disability,” says Peter Hamilton, Zurich’s head of market management.
“As well as the financial benefits of having cover, this campaign highlighted the importance of rehabilitation that is available – with access to treatments like counselling and physiotherapy that can be hard to access via the NHS.”
Both Openwork and Sesame have reported significant uplifts in protection sales.
Jiten Varsani, independent financial, mortgage and protection planner at HV Financial Planning, agrees: “The Seven Families initiative was a great tool to help promote income.
“As too is the work done by the Income Protection Task Force – its website is certainly worth a visit for anyone who wants to increase their familiarity with [IP].”
Justin Harper, head of marketing at LV, points out some adviser networks have made efforts to support more IP conversations, including Openwork and Sesame Bankhall, which in turn has boosted sales.
“For example, Openwork mandates protection conversations with every mortgage sale through its integrated system and risk report,” he explains.
“Sesame Bankhall launched its ‘Rewire Routines’ campaign in June; encouraging advisers to sign up to a charter, commit to getting a protection quote for every mortgage application and create healthy habits over 21 days with access to material, resources and support.
“Both Openwork and Sesame have reported significant uplifts in protection sales.”
Mr Hamilton says: “At Zurich, we’ve just announced the launch of ‘Agile Protection’ – a major project with the University of Oxford to examine ways of supporting more workers through social protection frameworks, including IP.
“This follows a global three-year programme where we explored the causes and impact of [IP] gaps on households due to illness and disability.”
He notes that gathering information such as this helps the business develop more flexible products and services that appeal to customers.
More, more, more
Other providers have tackled the protection gap issue by expanding the coverage of their IP offering.
Ms Thomson lists some of the added benefits it provides, such as virtual GP services, free death benefit and shopping discounts.
Mr Harvey acknowledges: “Recently, a number of insurers have relaunched/revamped their [IP] offerings to offer added extras to the policy. This includes services such as children's critical illness cover, built-in fracture cover and hospitalisation benefit, access to remote GPs/second medical opinion services and more.”
My advice is to keep it simple and evolve the protection conversation to the needs of your client.
He suggests by improving offerings, providers are making their policies more attractive to clients and improving the experience for existing clients.
“I've always included [IP] together with life cover and some [CI] cover as part of our lifestyle protection planning,” Mr Varsani explains.
“I have noticed, however, an increase in the promotion of [IP]. Both LV and AIG (to name a couple) are certainly promoting their [IP] propositions more on social media and via emails and webinars.”
But Mr Varsani is less convinced by providers that simply add more benefits to their income protection plans.
“Though valuable, clients are not going to suddenly want [IP] because it includes, fracture cover, parent and child cover or death benefit,” he notes.
“It'll take a while, but if we keep educating clients (and advisers), there is no reason it cannot increase in awareness and understanding.”
He adds: “Adviser attitudes are slowly changing but it'll take time. My advice is to keep it simple and evolve the protection conversation to the needs of your client.”
How can advisers and brokers start the protection conversation?
Income protection is not coming up in the protection conversation between advisers or mortgage brokers and their clients – or at least, not as often as it should.
But as recent figures show, these conversations need to happen.
Zurich’s recently published Cost of Resilience report found 53 per cent of UK adults have had unplanned leave from work, through sickness or injury, or have been unemployed in between jobs, “yet they have no financial provision in case it happens again”, says Peter Hamilton, head of market management at Zurich.
Justin Harper, head of marketing at LV, points out: “Advisers are well placed to enlighten their clients about the need and value of protecting income.
“Despite the opportunities to do so, not enough protection conversations are happening, particularly in the mortgage and wealth sectors.”
Rob Harvey, head of protection advice at Drewberry, acknowledges: “Mortgage advisers/brokers don't tend to discuss [IP] with clients – protection conversations from mortgage brokers tend to be focused much more heavily on critical illness cover.”
There has been some regulatory scrutiny of the so-called ‘protection gap’ recently, with the publication of a paper by the Financial Services Consumer Panel in September this year: ‘Understanding the Protection Gap’.
It called for more co-operation between regulators, product providers, reinsurers, lenders and intermediaries, and warned some of the benefits of products like IP were hidden behind “complex choices and caveats in the small print”.
Mr Harper cautions: “It’s worrying that if the whole industry doesn’t step up, the risk of regulatory intervention increases.”
He goes on to point out that recent initiatives and industry focus on protecting income have been “encouraging”.
“We’d far prefer industry good practice than compulsion – which can involve a one-size-fits-all solution and risks becoming a superficial tick box exercise,” he notes. “Talking about protection with every client in every conversation would make a huge difference in building household financial resilience and fulfilling our duty of care.”
Discussing illness and death is also something some shy away from, but it’s important to ensure clients understand the risks and the options available
How can advisers and brokers make that leap from talking about mortgages, to IP?
Emma Thomson, product strategist at British Friendly, admits it can be “challenging” for mortgage advisers to start a protection conversation after what is often a lengthy mortgage application process.
“But, ultimately, they have a responsibility to help their clients stay in the home they’re helping them buy,” she adds.
“Discussing illness and death is also something some shy away from, but it’s important to ensure clients understand the risks and the options available.”
She says, asking directly whether a client wants life or CI or IP cover will “rarely lead to a successful conversation”.
So Ms Thomson suggests using open questions, “about how their clients could afford to pay the mortgage and essential outgoings if they were unable to work. Or if there is a partner/family to consider, could they afford to stay in the family home if the client were to pass away unexpectedly?”.
She says: “Begin this conversation early in the discussions as part of the mortgage advice on home ownership, rather than an ‘add on’ at the end, so it’s factored into the budget and process of arranging the mortgage.”
Mr Harper calls this a “fully protected mortgage” approach, “where protection is considered an intrinsic component of the mortgage solution and process”, and is seeing more advisers adopting this.
He suggests a couple of routes into the protection conversation with clients:
- What will your employer provide? Many people do not know what their employer provides. Ask your client to bring along their contract of employment and benefits as part of your initial meeting. And, if they are, self-employed, where is their IP policy?
- Where does your money go? Get your client to fill in a budget planner as part of their preparation for their initial meeting. How would your client pay for all these if they had to stop working – and what would they be happy to give up? Many providers offer budget planners as an interactive pdf, which also illustrates how their income will drop in the event of illness and what they might get from the state.
Jiten Varsani, independent financial, mortgage and protection planner at HV Financial Planning, explains: “My introduction to protection planning during a mortgage conversation is, ‘My job is to help you get the keys to your new home, and more importantly, help you keep the keys to your home’.”
He says when he asks clients what they would want for them and their family should they die or become unable to work, they rarely say they want their mortgage paid off, but rather end up having a conversation about all round financial security and lifestyle protection.
Some advisers and mortgage brokers may not be familiar enough with protection products to feel comfortable starting even an initial discussion with clients.
Or they might simply be new to protection and still want to build on their knowledge.
Mr Harvey says: “Mortgage brokers perhaps need more education about the availability and value of [IP] so that they feel more confident in promoting it alongside other protection options.”
Mr Harper suggests the industry is willing to share good practice – “so a simple tip for advisers is to connect and learn from someone who is already selling [IP]”.
He adds: “Another rich seam of information and know-how is the new Income Protection Task Force website and its regular e-bulletin. Networks provide plenty of support and so too do providers."
Finally, Ms Thomson suggests: “If you feel you don’t have the capacity or knowledge to properly advise on protection as well as mortgages, partner with a protection specialist to refer your clients to for their protection needs.”
How IP has adapted to meet the needs of the self-employed
Being self-employed has its perks.
There is no-one to answer to – you are your own boss, in other words – and, often, self-employed workers can dictate their working hours. For some, it is about not being tied to a nine to five office job or simply being able to fit work around other priorities, such as childcare.
But there are also some disadvantages, such as no sick pay or annual leave, and not as much support from the state as some might think.
These factors can put self-employed workers in a vulnerable position should they be unable to work for any period of time.
Justin Harper, head of marketing at LV, confirms there has been a rapid increase in the number of people who are self-employed in recent years, with one in six workers falling into this category now.
“In the LV Income Roulette Report last year, we delved deeper into the financial resilience of the self-employed,” he explains.
“Two fifths (41 per cent) of self-employed workers told us they couldn’t afford to save any money each month – equivalent to two million on a national scale, with a further one in 10 saying they could only afford to save less than £50.
“Monthly bills were flagged as the main barrier to saving, eating up the majority – nearly two thirds, or 62 per cent – of this group’s income.”
He goes on: “Just 4 per cent of this group have some form of income protection.
“What’s more, four in 10 mistakenly believed that because they’re self-employed, they’re not eligible for IP.”
When you work for yourself, you don't get anything in the way of employer sick pay to see you through illnesses or injuries.
Those statistics are worrying but hardly surprising.
Rob Harvey, head of protection advice at Drewberry, acknowledges why self-employed individuals may need income protection.
“The major difference between self-employed and employed workers is a lack of sick pay self-employed workers face,” he notes. “When you work for yourself, you don't get anything in the way of employer sick pay to see you through illnesses or injuries.
“It's here income protection can really step up to the plate and provide the comprehensive sick pay self-employed workers are lacking.”
Emma Thomson, product strategist at British Friendly, agrees that a lack of sick pay provision and limited access to state benefits means the self-employed do have different needs.
“Also, incomes often fluctuate and aren’t as straightforward as those who are employed.
“Income protection is therefore a good solution for those who are self-employed to ensure they have a safety net in place in the event of illness or injury,” she reasons.
Importantly, the protection industry has responded to the growing number of self-employed by offering more flexible income protection plans and offerings aimed specifically at those who are not employed.
Peter Hamilton, head of market management at Zurich, points out: “There are a range of products on the market now that have been designed to be flexible to suit the needs of people who work in different types of employment – including those [who are] self-employed.
“For example, shorter terms that make cover more affordable while offering the flexibility to extend it. This includes our newly launched IP range that enables customers to flex between a comprehensive ‘core’ policy, up to a ‘select’ and more feature-rich one.”
Mr Harvey confirms one of the ways income protection has been adapted by providers to meet the needs of those who are self-employed is by reducing the deferral time – “the amount of time you need to be out of work before you can make a claim,” he explains.
“Some insurers, typically those aimed at manual self-employed workers, even offer a ‘Back to Day 1’ deferral period, which means that if anything stops you from working for between three to five days or more you can make a claim and the payout will be backdated to the first day you were out of work,” he says.
Providers are also recognising that self-employed workers may find it more difficult to demonstrate how much they earn in a year – something that is easy for employed workers to prove.
“Another way in which income protection has adapted to aid the self-employed is the introduction of non-financially-underwritten policies, where you don't need to show proof of earnings. This can be especially valuable for self-employed workers whose income may be volatile,” Mr Harvey suggests.
Advisers are well placed to help educate this group, not only of the advantages of IP, but also the reality that they too can be protected.
Ms Thomson points out this type of flexibility is offered by British Friendly.
“British Friendly’s Breathing Space product, for example, helps those who have fluctuating incomes and/or incomes which are hard to prove as, unlike traditional income protection plans, the claims criteria is not based on income,” she says.
“This plan is also suitable for gig economy workers.”
Mr Harper adds: “We offer our traditional IP contract and also personal sick pay – our product designed for higher risk occupations and those more difficult to insure.
“Both are available for the self-employed, with limited payment term options, and within a menu plan with life and critical illness cover.”
Of course, self-employed clients may not even be aware they are eligible for income protection unless their adviser strikes up a conversation about protection with them.
As Mr Harper says: “Advisers are well placed to help educate this group, not only of the advantages of IP, but also the reality that they too can be protected.”
House View: Your client’s most valuable asset – overlooked, under-appreciated and ignored?
Many of your clients might consider their most valuable asset to be their house, car, maybe their pension savings or the prospect of an inheritance. But like most, they’ll overlook the obvious – themselves and their ability to earn.
Even an average UK worker can expect to earn well over £1m (1) across their working life.
Income pays for everything - the essential everyday bills such as mortgage, rent, utilities and food, plus the comfortable extras such as holidays, nights out and treats. Their income also fuels their savings, pension contributions and their family’s future - not just today’s expenses.
And while people have money worries, rarely does anyone wake up with a screaming urge to protect their most valuable asset – their income – against the possibility of a life shock.
Instead, they’re more likely to insure their mobile phone or their much-loved pug, more contracts they wouldn’t be able to pay should they lose their income. Income is an over-looked and under-appreciated treasure.
If you know of the ‘money- making machine’ sales concept, you’ll appreciate the irony (and if you don’t, then contact me and I’ll let you know more).
Awareness, understanding and demand for protecting income among consumers remain frighteningly low. But, as we highlighted in our LV= Income Roulette report last year, there’s an increasing need for UK households to build their financial resilience against an income shock such as being unable to work because of illness or accident.
In our research, just 44 per cent of people (2) said they had the MAS recommended levels of emergency savings (three months of outgoings), to protect them against a financial shock.
With rising living costs and few having any form of back-up plan – only 14 per cent of adults have some form of IP (2), many face the harrowing prospect of financial difficulties if their income stopped or dropped.
From our industry perspective, protecting income doesn’t fare much better. While it is widely recognised as the priority protection need, this logical common sense doesn’t convert well into practice. Despite the recent sales increases, topping over 120,000 last year, IP remains the poor relative in terms of volumes, with nine times more term sales and five times more CI sales in 20173.
Have we got protection the wrong way round?
Righting the wrong?
Over recent years we’ve witnessed some impressive growth in IP sales, although from a smaller base, and more positive sales reports in 2018. The resurgence was ignited by the Seven Families initiative back in 2014 and has been further fuelled by greater provider participation.
IP is now more mainstream with options available from most providers. At LV=, for example, we offer our traditional IP contract and also Personal Sick Pay, our product designed for higher risk occupations and those more difficult to insure – both are available for the self-employed too, with limited payment term options, and within a menu plan with Life and CI cover.
Encouragingly, IP is enjoying far greater and more regular adviser engagement, with support from several quarters:
Networks: Several major networks and leading firms have taken steps to support more IP conversations.
For example, Openwork mandate protection conversations with every mortgage sale through its integrated system and risk report. Sesame Bankhall launched its Rewire Routines campaign in June; encouraging advisers to sign up to a charter, commit to getting a protection quote for every mortgage application and create healthy habits over 21 days with access to material, resources and support.
Both Openwork and Sesame have reported significant uplifts in protection sales.
Technology and portal: Advances in technology are helping boost IP conversations and sales.
Wider adoption of multi-benefit sales systems, such as iPipeline’s Solution Builder, has enabled advisers to more easily integrate IP into protection packages. iPipeline reported that during Q1 this year, 35 per cent of IP policies were sold through multi-benefit plans, up from just 15 per cent in 2016.
Often IP is considered to involve a complex underwriting process. There is a higher likelihood of a claim with IP, so we need to consider more factors.
Systems such as UnderwriteMe have transformed the traditional approach to risk assessment, with indicative ratings, more transparent decision making and a higher proportion of immediate decisions.
At LV= for example, we offer an immediate online decision for over 60 per cent of IP applications (4).
Training and support: The Income Protection Task Force has entered a new phase, with a recently revamped website, packed with helpful IP resources, regular e-bulletins and webinars on latest developments. Providers are weighing in too, sharing helpful insights and ideas about having meaningful protection conversations.
At LV=, for example, we held another season of Wake Up to IP events this year, attended by hundreds of advisers, with dedicated follow-up support and nudging. We’ve translated this into webinars and dedicated adviser webexes too, making material and support more accessible and convenient for advisers.
IP is changing: The IP world is a vibrant one, with plenty of proposition changes from insurers.
The trend towards limited pay-out period IP continues; two-year is the most popular, with one-year now growing too (3). We’re witnessing the introduction of more lump sum-type benefits within IP – for events such as death, hospitalisation, fractures and, recently from LV=, parent and child cover.
Added value services and early intervention support are becoming the norm, demonstrating that IP is more than just a pay-out.
Increasingly, providers are including non-claim (almost ‘preventative’) services through the likes of GP services, prescriptions, health checks and medical/counselling support. All make IP far more meaningful for clients, more relevant and more engaging.
Does it boil down to a duty of care?
Advisers are well placed to enlighten their clients about the need and value of protecting income. Despite the opportunities to do so, not enough protection conversations are happening, particularly in the mortgage and wealth sectors.
It’s worrying that if the whole industry doesn’t step up, the risk of regulatory intervention increases. The signs are heading that way; just read the recent Financial Services Consumer Panel ‘Understanding the protection gap’ report and its recommendation: "The FCA should give mortgage lenders and intermediaries direction as to whether they should talk to borrowers about the impact of lost or reduced income." (5)
This obligation is supported further by the underlying ‘best interests’ test within the Insurance Distribution Directive (IDD).
While many reactions to IDD have been focused on the demand for CPD, the directive goes far deeper. There is an underpinning ‘duty of care’ for advisers to address a protection need or signpost the client to a specialist.
This may take time to seep through, yet adds to the expectation that advisers need to raise the subject of protection with their clients, it can’t just be ignored – and protecting income should come first.
Talking about protection with every client in every conversation would make a huge difference in building household financial resilience and fulfilling our duty of care.
After all, IP is simple - it works when your client can’t. That’s got to be a worthwhile thing.
Justin Harper is head of marketing at LV
(1) Prudential analysis of ONS
(2) LV= Income Roulette research, 2018
(3) Swiss Re Term & Health Watch, 2018
(4) LV= Underwriting applications 2018
(5) Financial Services Consumer Panel Discussion Paper – Understanding the Protection Gap, September 2018