Something drastic needs to be done to make the protection landscape fit for today’s world
Like most journalists, when I first began writing for Money Marketing years ago, I needed to be schooled in the ways of financial services. In my case, this role was carried out by a small coterie of energetic financial advisers who took to their task with relish.
Always eager to learn, I remember asking them what their first piece of advice would be to prospective new clients. Almost to a man (there were not many women in the industry then, as now), the first lesson they shared with me was: “Protect what you already have.” The second: “Protection is not bought but sold.”
In other words, before talking to a client about fancy investment schemes or retirement planning, make sure they have cover in place for themselves and their family in the event of sickness or death.
While many advisers today still pay lip service to the same notion when discussing financial planning needs with their clients, I suspect it does not have anything like the same resonance now as it did then.
Perhaps unsurprisingly, a recent discussion paper by the Financial Services Consumer Panel, which purports to advise the FCA on consumers’ interests and concerns, reported that two thirds of UK adults have no protection cover in place at all, and more than seven in 10 have no life insurance.
It is widely acknowledged that many consumers have inadequate protection insurance such as life cover, critical illness or income protection.
This leaves them and their families vulnerable to the effects of catastrophic life events such as early death or long-term illness.
The panel discussion paper notes: “The so-called ‘protection gap’ has been debated and researched for many years, to little effect.
“In recent times, legislative changes such as automatic enrolment, pension freedoms and the introduction of universal credit have taken centre stage. The policy focus has been on saving as a means of building resilience, rather than encouraging people to think about how they manage the risks they face in life.”
Panel chair Sue Lewis is undoubtedly right when she points out that the risks of not having the right cover in place are greater today than for a long time: “Protection products have not kept pace with the needs of today’s workforce. People now are more likely to be self-employed or have insecure employment, with volatile incomes.”
The report points out that many products are still the same as they were 30 years ago. They mostly do not cover a range of work-limiting illnesses that have come to the fore in recent years – mental health issues, for example.
Why are people unwilling to take out cover? For the most part because they do not understand the nature of the cover that is available or the consequences of an untoward event like a serious long-term illness happening to them.
The panel found that, while people it questioned got the concept of a lump-sum payout in the event of a critical illness, few understood that some conditions might mean they could not return to work for a long time, if ever.
There was confusion about what income protection meant, about what they might expect their employer or the state to pay them, and for how long if they went on long-term sick leave.
Most had no idea about what their employers’ policies were in this area and believed they would be paid for longer than was actually the case.
On one level, none of these issues are insurmountable. A more strategic and proactive approach by the industry towards explaining the role of income protection to consumers could play a part.
The report also makes some useful recommendations; for example, reviving a proposal in the 2013 Sergeant Review of Simple Financial Products for straightforward industry-wide protection plans that concentrate on an income protection and critical illness hybrid product.
It also wants the new Single Financial Guidance Body and the Association of British Insurers to work with employee benefit consultants to use the ABI’s under-development protection calculator to encourage employers to provide clearer information to their employees about their sickness benefits.
The problem is that none of these ideas – and others in the report – are the silver bullet that will help to change the protection landscape for consumers.
What might work is the same approach towards income protection as the state has already adopted in respect of auto-enrolment, with an opt-out for those who do not wish to join.
This would allow for far cheaper workplace protection schemes to be put into place, perhaps with more limited benefits with maximum payout periods lasting two or three years. It would also help pool risk more effectively across a far wider layer of the population.
It additionally means compelling employers who benefit from the gig economy, or their agents who supply the labour, not only to have such schemes in place for their supposedly self-employed workers but to contribute
For advisers, it means rediscovering the mantra of “protect what you already have”. Protection may still need to be sold, not bought, but selling it would be much easier within an overall fee-paid financial planning contract that covers it alongside investments and pensions.
Nic Cicutti can be contacted at firstname.lastname@example.org