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Cinderella and the ugly scenarios

For many years, we have referred to income protection as the Cinderella product. Although the need it meets is obvious, it has never been very successful. It has often lost out to critical-illness cover, even though the two products are complementary rather than alternatives. But this Cinderella will not go to the ball unless we overcome the perceptions of some consumers and, indeed, IFAs about income protection.

At Bright Grey, we have been doing a great deal of consumer research over the last year. When groups of people start to talk about their lifestyles – their mortgage, where they like to go on holiday, how they spend their spare time, what they buy for their children – protecting their income becomes much more important to them. They realise that income is the foundation of everything they do in life and can see the problems they would face if their income stopped.

If people can appreciate the need for income protection, why are they not buying it? In many cases, they are not even being sold it.

Feedback suggests that the product is too complex, riddled with tricky definitions and fiendish exclusions and having a difficult underwriting and nightmarish claims&#39 process. It is possible, however, that much of this negative feedback is more perception than reality.

Over the last few years, underwriting has become increasingly innovative to ensure that policies can go on risk as soon as possible. Online underwriting is also making the process easier.

We have also seen great improvement in the clarity of definitions and exclusions. Definitions are now easier for the customer to understand and should mean less of a problem at the claims stage.

Clauses that have always hindered sales are beginning to disappear from income protection policies. This has to be applauded from the customer&#39s point of view but highlights the need for more to be done in this area. Greater clarity will let clients know exactly what is covered and what is not.

If the underwriting is easier, the definitions clearer and there are fewer exclusions, why does income protection still not sell as well as critical-illness cover? Some say that critical cover is still easier to understand and that the sales message is very simple: “If you get one of this list of illnesses, you will get some money.”

However, I am not convinced that critical cover is a simpler product than income protection. The reasons given for the undesirability of selling income protection also apply to critical insurance. This point of view really strengthens the argument that income protection and critical cover should be sold as complements.

But whether or not income protection is sold alongside critical cover, there are many opportunities to position IP as an important foundation to a client&#39s financial plans.

For example, if a client became ill and could not work, the premium waiver on his pension plan would ensure that premiums continued to be paid to keep the investment on track for the target retirement income. But premium waiver may not be enough if your client is not receiving sufficient income from elsewhere. He may be tempted to take his pension early, meaning that retirement income will be much reduced. Income protection could prevent this from happening.

Another angle is to position income protection, combined with critical cover, as “ambition” protection. Most people have ambitions, for example, to retire early and travel the world. They may plan to move abroad, open a business or save for that classic car.

As we know, savings and investments are often the key to realising ambitions so it is important to ensure they are protected. Investors can protect themselves from stockmarket unpredictability by investing in protected or guaranteed funds. But without financial protection, the only option following illness may be to tap into those savings and investments. This could mean that those ambitions would be more difficult to achieve.

So the need for income protection is there. The product is getting clearer and people will buy it if we paint the right pictures. Building on the success of critical illness and putting forward income protection as a natural complement will also maximise the business potential.

Cinderella will go to the ball if we really want her to.

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