After all, everything we do in life, from paying bills to going on holiday and feeding the family, derives from what we earn, but despite demanding pole position in the protection hierarchy of needs, income itself has always been placed a poor third behind life insurance and critical illness cover when it comes to sales.
There are several reasons for this. First, many life insurance companies do not place much priority on income protection because it forms such a small part of their overall protection book. There is more volume of sales available with life insurance and critical illness cover, and often higher margins. Therefore, product developments and marketing campaigns for these product lines often take priority over income protection. So it can be difficult to make the business case for income protection development when market shares are low.
Second, income protection is a very compex product, even from the point of view of explaining the benefit. If you think about the messages for life insurance and critical illness cover, it is simple: if you die, your family gets paid a large sum of cash; if you get a critical illness, you get paid a large sum of money.
Unfortunately, with income protection the benefit is not so easy to explain. For example, the amount of cover is uncertain until the point of claim. Okay, so at the outset you will know that you are covered up to a certain percentage of your salary, but the benefit that will be paid on disability is usually based upon the salary you are earning at the time you claim. And the state benefits claim might be deducted from this amount. It may also be reduced if you work part-time or return to work in a lower capacity job.
The other big issue with income protection policies has always been the definition used to measure incapacity. Until recently, there have been up to five different definitions.
The ‘own occupation’ definition is by far the easiest to understand and obviously provides the most comprehensive cover. I believe the ‘own or suited occupation’ definition has always been open to misinterpretation. I remember having conversations about the ‘any occupation’ definition from concerned policyholders who felt they would be denied a payment if, although severely disabled, they could still do a job pushing buttons. I sometimes struggled to believe my own written assurances to the contrary.
Then there are definitions based upon the ability to perform ‘work tasks’ or ‘living tasks’. Historically, work tasks have suffered from the same impossible-to-claim tag as the any occupation definition, due to the harshness of its terms.
For years advisers have been clamouring for insurance companies to offer only the own occupation definition, even though some occupations might become uninsurable. Well, this is finally starting to happen. Pressure from advisers and consumer groups has led to launches of products that only use the own occupation definition. And, even better, the number of occupations for which it is available is ever increasing. Now up to 95 per cent of occupations qualify, compared to perhaps 75 per cent five years ago.
The friendly societies have blazed the trail to use only the ‘own occupation’ definition (I guess those friendly societies that specialise in income protection do not face the larger provider problem of it only comprising a small portion of their book), but now more of the mainstream providers are catching up. Recently, Royal London moved to almost an all own occupation definition with a back-up, much improved, work tasks definition. Even more recently Aviva launched their own occupation-only product.
These developments show that we are on the right trajectory. These are policies that offer the best cover to the most occupations possible.
This does not solve all our problems, of course. The product is still complex with different deferred periods, percentages of salary covered and rehabilitation options. But if we can continue to simplify and focus only on the options that are absolutely necessary then perhaps we can finally begin to elevate income protection higher up the recommendation ladder.
It has taken a long time to get to where we are today, but hopefully we now have some momentum that will continue until we are left with a product that is simple, easy to understand and, most importantly, protects people when they need it most – when they can not do their own occupation.
Roger Edwards is a marketing, protection and social media consultant
Key points
- Income protection should be the number one priority for people looking to arrange their financial affairs during their working lives.
- With income protection the benefit is not so easy to explain.
- The friendly societies have blazed the trail to only using the ‘own occupation’ definition.
