How income protection has 'held its value'
30 September 2020
This article was originally published in FTAdviser.com.
This is an important message to the industry because it demonstrates that advances in underwriting processes in recent years, including tele-underwriting and sophisticated online application systems, has reduced the number of declined claims due to non-disclosure.
Whether this a good message for consumers is a debatable point.
Many people would hold that once they are accepted for insurance, their claim should be paid – the basis of the argument for non-contestability clauses, prevalent in the US.
Others, taking a more jaundiced view of insurers, might be surprised that the claims paid percentage is so high.
Either way, claims paid data needs to be positioned carefully with customers as it has the potential to raise all sorts of unhelpful questions.
What is really good news for customers is that the 98.3 per cent of claims paid amounted to some £5.7bn of benefits.
This is real money that has helped people in financial distress.
It is a testament to insurers and financial advisers who, day after day, meet with clients and see that their financial vulnerability is addressed, and proof positive of the wisdom of taking out life and protection policies.
Income protection insurance, arguably the poor relation to life assurance and critical illness products never-the-less accounted for £669 million of benefits.
This has helped people who were unable to earn a living due to illness or disability by contributing to their household budgets during their absence from work, not to mention the practical and emotional support afforded by the health and wellbeing services integral to many of these policies now.
According to Defaqto’s Engage database, there are 54 income protection products from 22 providers and the majority of them offer value-added services to policyholders.
Percentage of providers offering value-added services. Source: Defaqto
These services are not just ‘nice to have’ add-ons.
In research undertaken by Defaqto among intermediaries in 2019, upward of 33 per cent of advisers said that claims support, second medical opinion and virtual GP services add real value, with a further 5 per cent or more saying it helps them sell a greater number of policies.
Also, these services have not just found favour with advisers, but are valued by clients too.
As the recent series of videos from the Income Protection Taskforce (IPTF) is keen to emphasise, the interventions available from income protection insurance providers are, in some cases, as valuable as the monetary benefit.
Remembering 7Families looks back at the income protection insurance publicity campaign of 2014, which together with the training programme for advisers on income protection insurance had such a positive effect on the market.
According to SwissRe, sales of new income protection insurance policies increased year on year between 2014 and 2018 and by 64 per cent in total over that period.
2020 – the acid test
It’s not unreasonable to expect similarly good results for 2019, however, there is no doubt that 2020 will prove to be a challenging year for protection, but one that will ultimately prove its worth.
One insurer, LV, reports that up to 30 April, it paid out 146 Covid-19 related claims.
These prompt payments to policyholders with short deferred periods will have delivered much needed financial support at a difficult time for them and their families.
Other providers offering short deferred periods will, no doubt, also have positive stories to tell.
Fortunately, most people who contract Coronavirus do not die and, while the symptoms can be unpleasant, recover relatively quickly.
This means that claims in respect of Covid-19 on existing life assurance policies and IP policies with longer deferred periods are relatively few.
However, for the families of those who sadly have died from the disease, their life assurance will have provided much needed support; and for those sufferers with short deferred period IP, again, it is likely they will have been able to benefit from their protection provision.
When setting up IP cover for clients, one of the key decisions to be made is what deferred period to choose.
For employed people, it is usual to dovetail the deferred period with the employer’s sickpay scheme.
Eligible employees who are too ill to work are entitled to Statutory Sick Pay (SSP) from the fourth day of their absence for up to 28 weeks.
It is currently just £95.85 per week and paid by the employer.
In reality, most employers continue to pay their workers at a rate above SSP for a period of time – their full salary in many cases.
But, research by XpertHR in 2018 found that while 92 per cent of employers technically offered more than SSP, most only do so for four weeks or less.
It is important that advisers ask their clients to find out the details of their employer’s sick pay scheme, if any, before they meet them so the most appropriate deferred period can be established.
For self-employed people, the ideal will most likely be a short deferred period of, perhaps, just one or two weeks, or even day one cover depending on their circumstances.
However, shorter deferred periods are more expensive and advisers may recommend a longer deferred period in order to reduce costs for those clients on a tight budget.
It is important though, in the event of a claim, that the client has other means to tide them over until the IP benefit kicks in, perhaps some savings or a partner’s continuing income.
In reality, much IP business is written either on a 13 week or 26 week basis. A straw poll by Defaqto among insurers reveals that between a third and half of traditional long term IP is accounted for by 13 week business.
This is most likely because the insurers price the product at that level making it the cost-effective option for many clients.
Defaqto’s own data reveals that advisers frequently sift on the 13 and 26 week deferred period criteria, but far less on 52 week, 4 week or 8 week; and 1 week and Day 1 cover are rarely selected.
Percentage of sifts on Defaqto Engage relating to deferred periods. Source: Defaqto.
Fortunately, a significant number of employers do pay full (or reduced) salaries for extended periods.
XpertHR’s research shows that just short of 10 per cent of firms offer sick pay for three months and 7 per cent for six months.
Also, the mass affluent, typical of clients of financial advisers, are perhaps more likely to work for such firms, hence the focus on 13 and 26 week plans.
When it comes to the self employed and those who don’t benefit from an employer’s scheme, the emphasis is much more on short deferred period plans.
Short deferred periods
Of the 22 IP providers on Defaqto’s Engage database, there are 13 that ordinarily offer shorter deferred periods – for example, 1 week, 2 week or Day 1 cover.
These include the Friendly Societies and Provident Societies as well as some specialist IP providers that typically cater for blue collar workers and the self-employed.
The experience here is different with our straw poll demonstrating that much more business is written on a 1 week or 4 week basis than 13 or 26 week, especially for limited payment term products.
The use of age-related premiums and in some cases reviewable premiums helps to make this cover more affordable for people who potentially have no other financial support if they couldn’t work.
As a result of the Covid-19 crisis, eight providers stopped accepting new applications for Day 1, 1 week and 2 week cover, and in two cases, 4 week cover.
This was presented as a temporary measure and it is anticipated that these options will become available again at some point.
However, four providers have retained their shorter deferred periods choosing instead to apply an exclusion relating to Coronavirus.
For new applicants, this means that shorter deferred periods are still available in the market, although they would not be able to claim for absences from work due to Coronavirus.
For existing policyholders, they would be able to claim; and all policyholders can benefit from the counselling and support services integral to these policies.
So, while for new applications it has been necessary to take steps to manage the risk that Coronavirus presents, the insurers have taken a proportionate response and risen to the challenge of providing cover where they can and supporting existing customers.
Even in these difficult times, income protection insurance retains its value and remains the main plank of protection planning.