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Do we need a protection hierarchy of needs?

Is term life cover 10 times the product income protection is? Do 10 times as many people pop their clogs every year as those who take six months or more off work due to say an illness or stress?

Of course  not. So why does term life cover outsell income protection by around 10 to one? And likewise why are twice as many life policies sold compared to critical illness cover, when a CI claim is around five to six times more likely?

Well, we know why of course, life cover is cheaper and (so much) easier to sell. Plus, you do not tend to recommend multiple IP policies to one client/family, when you could easily justify three to four life policies to cover different risks.

That said, most of us would agree there has been too much focus, for too long, and by too many on selling little more than cheap life cover.  Not just by the industry but consumers as well – they shop around for life cover, but few look for what they really need.

So might an agreed, high-level, hierarchy of needs for protection make a difference?

Should we ever get that far, we would need to get the message across via consumer groups, websites and the media. We would also need to keep it simple and make some very basic assumptions, perhaps such as no existing cover, good health and a realistic level of budget (otherwise it just gets too complicated and as an industry we would never agree on anything).

Although on the flip side, it might be too simplistic to just say IP is better than CI, for example as we may decide it depends on the actual level of cover and not just the type of product. 

So, here is one for starters. Feel free to argue about it on this forum , because that Is what we are after – intermediary and industry feedback. We will never get everyone to agree of course, and there will always be challenges, which is healthy.

1.  Income protection (specifically own occupation)

2.  Critical illness cover (including cover for early stage cancers)

3.  Life cover (term and whole of life, depending on the circumstances)

4.  Private medical insurance

5.  All others (including other versions of the above)

Does that mean that if you cannot obtain own occupation IP you should buy a good CI plan instead? Well, yes maybe. And vice versa.

But what do you think?

Kevin Carr is Chief Executive of Protection Review and Managing Director of Kevin Carr Consulting.


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There are 20 comments at the moment, we would love to hear your opinion too.

  1. Kevin,

    You’ve restored my faith in MY recommendations as an adviser. Only recently I was involved in an online discussion whereby I stated that IP was more important than life cover, based on the realistic likelihood of claiming. One IFA respondent replied with incredulity at why I would recommend IP over life cover to which I asked why you would NOT insure yourself for the most likely occurrence?

    Their response was that death has the greatest financial consequence i.e. total loss of income forever and people insure themselves for the risk with the greatest possible negative outcome. On that basis, I’ve decided to spend several hundred pounds on lottery tickets since winning that (albeit almost infinitely unlikely) would have the greatest possible positive outcome on my life! Personally, I’d much rather place more of my hard earned cash on a 5:1 bet than a 100,000:1.

    One thing I do think needs illustrating to clients quite strongly is that we are not recommending IP on the basis of forgoing life cover, as I think that doesn’t necessarily take into account a client’s “wants” and we need to cross off the wants so as to address the “needs”, but that for clients with all but the smallest of budgets there is almost always a way to include all elements of cover within their allotted budget…..and we all know some cover is better than none.

    On that basis maybe all protection products should be a priority 1, but simply with different weightings for each product? (I may be splitting hairs here)

    Based on your prioritization I say it’s spot on based on the underwriting limitations and terms offered

  2. There is no right or wrong way – its what the client percieves as having the greatest inpact on their financial stability.

    If the job is done property all aspects of financial disaster should be covered.

    As for PHI – many people have sickness benefits with their employers albeit somewhat limited and PHI for self employed forget it.

    The protection market in the UK is stagnant. No innovation.

    When I look at some of the schemes offered in other countries ie female specific criticall illness, Met life – Vision for life, Three Payment Plan, or Income Builder Plan etc etc etc.

    We are way behind.

    Get more innovative, give value and thing will change.

  3. I agree with the hierarchy of protection you have set out.

    I would like to overlay basic financial needs over that. The two main basics we are looking to cover with protection are:

    1) Income replacement
    2) Debt repayment

    Income protection takes care of 1) on occupational disability, Income based life cover (FIB) takes care of it on death.

    For Debt repayment that is lump sum CI and Life cover.

    So for Income replacement the hierarchy is IP and FIB and for Debt Replacement it is CI and Life Cover.

  4. You would generally find that the client who has no inc prot but has life/cic cover comoing out of their ears will more than likely cancel the lot once his income has gone due to longer term illness anyway. The vast majority of clients gamble that their income will remain intact completely ignoring the statistics surrounding acc/sickness or even unemployment and prefer to spend more insuring their cat.

  5. The real problem is that there is such a lack of financial education in the UK, possibly/probably brought on by a sense of welfare culture whereby a] ‘they’ will look after me and b] it won’t happen to me anyway.

    As has been mentioned, people will happily pay thousands a year to insure dog, cat, horse, house, Citroen Saxo but view personal protection as being ‘too expensive’. The value chain has been lost unfortunately.

    As for hierarchy of needs, this will always depend on an individual’s circumstances at the time. IP is likely to be the greatest need based on claims experience but that’s why premiums are relatively high compared to term assurance.

    CIC is more difficult to quantify beyond repaying debt as the financial consequences are clearly unknown depending on the nature of the CI one suffers and ongoing prognosis.

    Financial planning and risk analysis are the key but the average UK Joe [and indeed the regulator] does not see the value in this – just the cost and a product ‘sale’!

  6. Don’t worry guys – the Money Advice Service will sort this out for 99% of us.


  7. be careful of proscription when it comes to advice

    no one recovers from death so a clients family won’t thank you because you followed a check list which put income protection first,

    in an ideal world when every client has sufficient income to spend on all areas of protection need it would not matter what was first on the list,

    discuss the areas of need with you clients.
    the risks, thier budget,
    don’t be an order taker,

    I have been advising clients for 25years , when someone dies everyone else who walks up to the family door brings their sympathy, Im the only person who brings a cheque.

  8. Good comments all – and no one yet really disagreeing? Which is nice! I agree that there is no one set solution for everyone, that kinda goes without saying. My hope here is that if we can get this message (i.e. that it’s not just about a bit of cheap life cover) across to a few more people, we’ll be doing something good.

  9. An excellent topic Kevin and I am in favour of a protection heirarchy to help inform consumers about risk and highlight potential solutions.

    There is of course a heirarchy of financial needs where insurance protection comes second only to debt management and ahead of savings and investment. This does not always get the publicity it deserves and a protection heirarchy would fit well within that and both should be given much greater exposure.

    Whatever the priorities driving advisers and the industry, I think consumers recognise that death is a certainty but ill health is not, without thinking about the relative risks over the time period that they are looking to insure.

    As others have said, how you rank the protection products depends on the circumstances of the individual, whether they have dependents, what financial commitments they have, whether they are in regular emoployment and if so how much they earn, what protection their employer provides and the adequacy of state benefits, what they can afford etc, etc but it should not be beyond our capability to build a matrix or come up with an algorithm to cope with this.

    Across the board, I think I would promote life cover above CI, simply because the coverage provided by CI is so limited in comparison to both life and IP but individual circumstances will be key. And then of course, we may soon have to work LTC into the equation.

  10. Matthew H Smith 3rd August 2011 at 12:03 pm

    When a review of protection takes place should it take into account the amount of protection cover provided by the employer? Group Life, Group Income protection and Group Critical illness can all provide cover at a cheaper cost (per person) and even higher amounts in the case of income protection. Add in the Non medical selection limits, tax rebates available to the company and Life cover automatically under trusts avoiding IHT and one begins to think that only the self employed need to consider an individual policy.

    Should the advice be to enlighten the clients employer and not just focus on individual products. How many clients know what benefits they are provided with by their employer? Is this the reason many employers think they don’t need to bother supplying Group cover.

  11. Short answer, No. My needs and there associated hierarchy are different to your. As a consumer, may I ask insurers and advisers to stop telling me what I want and start listening to me? And check out the BBC’s Big Money and Big Risk tests: they’re way ahead of most of the thinking we see in these columns.

  12. Alan, just searched the BBC site but not coming up. Can you tell me where it is please. Also, others have alluded to chances like Keven when he says you’re 5 to 6 times more likely to contract CI than die. What age is that before Kevin and does anyone know what the other likelihoods a re? e.g. how much more likely that you’ll be off sick before the age of 65 say, than contract a CI or die? Many thanks in anticipation. John

  13. Alan,

    You are absolutely right that as professional advisers we need to listen to our clients, however, a client can only make a fully informed choice when they are aware of all the possible options and combinations available to them and then really considers the potential risks of forgoing protection in certain areas.

    Purchasing life insurance is a very emotive subject and people find it far easier to visualise the financial impact of death than that of long term incapacity (which in reality can be far worse), but that doesn’t mean we should ignore the needs of the client and just act as order takers.

    A professional adviser listens to their clients and rather than simply addressing their concern and nothing else broaches the subject of alternative options and tries to create a comprehensive multi-faceted protection porfolio covering all areas of risk.

    Obviously, not all clients will take our advice, that is a fact of life, but provided the conversations are had then a far higher percentage are likely to take cover other than life only.

    This is one of the big issues with direct sales and online application systems. The conversation is never had in the first place, only a generic statement informing the client that they arrange the cover at their own risk.

  14. Re the Group question from Matthew, yes all existing benefits should be considered. But I don’t always feel that people should rely purely on these – people do move jobs or become s/e, sometimes benefits aren’t portable, and as much as I like group benefits there can be issues around pre-existing condition exclusions, which could be u/w indivudally on a personal plan. Sensible arguments both ways me thinks. Ps thanks for all the comments this week.

  15. Re the chances of things happening, I remember seeing a reinsurance slide a few years ago, which assumed something like age 30, in good health, chances of needing to claim before age 65… life cover 1 in 20, CI 1 in 7 and IP 1 in 4.

  16. People don’t buy IP, and CI as they have a very bad reputation for not paying out.

    It’s quite simple, no mystery.

    If Joe Public believed they would pay out as agreed when sold they would pay the premiums.

    The Protection / Advice industry have been their own worst enemies in this matter.

    There are too many horror stories on-line and in everyday real life from people who have had nightmares trying to get insurers to pay out on these types of policies, which they normally fail to do.

    Why is it do we think that the insurers won’t publish their real pay out data? I suspect because it’s too embarassing / harmful to their reputations.

    Full medical check up / MOT first and then a guarantee of paying out on the cover sold (except in the case of deliberate fraud).

    What no wriggle room! they won’t do that.

    Like I said – No Mystery why people won’t pay for these policies.

  17. I pretty much agree with Kevin’s article and every comment above, including the advantages (and dis) of Group risk and Alan’s comment about “Money advice”.
    The problem is, protection does need to be sold, people prefer to stick their head in the sand. Ignorance is bliss and it means keeping hold of more beer tokens if you’re not paying for what can go wrong i.e. health or death.

    I still work to the “PIMPSIO” order of discussion (I was going to say priorities, but the client prioritises, not me) as I agree, IPP is actually more of a risk to the consumer, but ultimately we guide and advise clients and provided we cover the PIMPSIO issues, we are doing our job.
    Protection (Life)
    Income Protection

  18. Excellent article that highlights the different ways you can look at the service an Adviser gives.

    On the one hand we have some saying listen to the client. That’s all well and good but it’s not really advising. I have listened to many clients and understand their comments perfectly. The problem is THEY don’t understand. It’s our job to help them.

    So yes by all means listen but don’t take that as the excuse to order take and shirk the difficult questions.

  19. My boss at Ageas Protect Martin Werth created a protection hierarchy during his time at Munich Re – admitttedly a long while ago now.

    He might still have a copy?

    I’m sure that the gang at Munich Re wouldn’t object to seeing if they still have it if Martin can’t find a copy of it himself?

    Seems silly reinventing the wheel!

  20. How good to read a sensible debate instead of people griping about their pet hobby horses. More, please.

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