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A new breed of income insurance

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Now it is a different story. With rising unemployment rates making the prospect of job losses ever more pertinent, now is the time to review your client’s finances and ensure they are as protected as they can be. Unlike a few years ago, you should be pushing at an open door because it is now more likely that your clients will have been touched by unemployment or know someone who has been recently unemployed.

Start by encouraging clients to dig out their employment contracts and find out what they are entitled to if they are made redundant or are unable to work due to accident or sickness. Some employers offer reasonable cover but many just meet the minimum statutory requirement.

Remember that to be eligible for statutory pay, workers must be employed by a single employer for more than two years. Under statutory requirements, employees over the age of 41 are eligible for just 1.5 weeks’ pay for each complete year worked for an employer. Younger employees are entitled to even less.

Most people will agree that the best form of protection is a savings buffer of around six months’ salary to draw on in case of unemployment. However, few people find themselves in this enviable position.

For those who are not, we must ask ourselves whether the protection market is ready to service their needs. Are the payment protection insurance products that exist today fit for this purpose?

Many believe the death knell has already sounded for PPI.

Some in the industry believe payment protection insurance has had its day but, says Kevin Paterson, sales and marketing director for Assurant Intermediary, the fragile economy and rising unemployment mean that a new approach to income protection is more important than ever

The FSA’s recent policy statement, the Assessment and Redress of PPI Complaints, confirmed its package of measures designed to protect consumers purchasing PPI products.

These new rules must be adopted by December 1 and there is speculation that 2.75 million people could be refunded as much as £2.7bn for allegedly being missold PPI. Some have estimated that the total cost to the industry of its wider package of measures could be as much as £3.2bn.

This may well cause some firms to reconsider their involvement in this type of insurance protection. Lloyds Banking Group has already made the decision to stop selling PPI entirely across all its brands and products.

There is no doubt that changes are needed in the way in which PPI is designed and sold because the world has changed significantly since PPI was introduced in the 1970s. But that does not mean we should throw it out altogether.

The volume of claims experienced by insurers in the three years since the credit crunch took hold bears witness to the valuable protection this product can offer.

Several products have been launched recently that bring a new approach to PPI.

One example is a product that changes the way a policy is underwritten by tailoring the premium to the individual risk of each client.

Another offers policies that are not tied to a mortgage or a loan, which allows consumers to cover outgoings such as rent.

These new products are closer to short-term income protection than traditional accident, sickness and unemployment cover linked to a specific financial commitment.

Such products give intermediaries greater opportunity to source insurance that truly meets the personal circumstances of their clients. And they have a significant opportunity to garner a greater share of the market. The withdrawal of Lloyds and others before them has created a gap that is waiting to be filled.

While mortgage payment protection insurance offers the right cover for some, the findings of the Competition Commission could result in more intermediaries looking for income protection that is not directly linked to a specific credit product. We cannot ignore the impact of what is going on in the wider economy that could well influence the decision by clients as to what is the most suitable cover for them.

Although house prices are reported to be falling, affordability is still an issue for many and it is likely that lenders are going to continue to apply strict criteria to their mortgage products. Therefore, intermediaries could well have more clients on their books who do not have a mortgage but who still want to protect their other financial outgoings.

The new breed of shortterm income protection provides an appropriate solution for these clients.

It is also widely expected that the prohibition on selling PPI at the point of sale of loans and mortgages will go ahead when the Competition Commission publishes its final report in October. This also represents a positive decision for intermediaries.

A key driver behind the Competition Commission’s recommended time delay between the financing agreement and the sale of PPI was the confusion it generated among consumers. Some were under the impression that PPI was a mandatory requirement and bundling the insurance with the purchase at point of sale meant many were not aware they had taken out insurance.

While prohibition is a positive move in the main, consumer lethargy could unfortunately result in many more people leaving themselves exposed by not having adequate or suitable cover.

Intermediaries should have an ongoing relationship with their clients and are best placed to offer advice on the appropriateness of products such as PPI, short-term income protection, longer-term income protection or a combination of policies and when these covers are most suitable.

IFA expertise provides a real opportunity for them to market themselves and the products they offer to their clients. Although some may think time has been served on PPI, in my opinion, it is more like the beginning of a new dawn for insurance protection.

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