Left to their own devices, few people take out income protection, so it is a challenging market for advisers to crack.
Given the Government is cutting back on welfare state spending and not all employers offer generous sickness benefit packages, is it time to incentivise income protection through tax relief or introduce auto-enrolment?
“Something needs to happen,” says Plan Money director Peter Chadborn. “There is lot wrong with the current process of the marketing and applying for income protection.”
Chadborn points out there is a need for education as people on lower incomes think state benefits are better than they are, while those on middle and higher incomes think their employers are more generous than they are.
“Another problem is the perceived complexities of the plans,” says Chadborn. “For advisers they are a harder sale; not as easy as tagging life cover onto a mortgage. They need to know what benefits the employer offers to make sure they dovetail. They need to know about someone’s expenditure and income so that person is not over-insured and they need to know how long someone can economically survive, because of the deferred periods on income protection.”
Chadborn believes there is a need to simplify income protection products and Highclere Financial Services partner Alan Lakey agrees. Like Chadborn, he cannot see why pensions and income protection work differently from a tax perspective.
“Why is there a disjointed method of dealing with these products that take the pressure off the Exchequer? If a £100 contribution cost people £80 because of the tax relief, we would sell more income protection,” says Lakey.
He believes people would not be bothered about paying tax on their income protection benefit to gain the upfront tax relief, as most think the income is taxed already.
Complete Mortgages insurance specialist Carolyne Fairfull says: “If brokers could offer an income protection policy that offers tax relief at the point of purchase then I’m confident that we would see more people arrange the protection they need. Making it more financially accessible at the front end would arguably be the first step.”
But LV= head of intermediary marketing Justin Harper says: “I don’t think consumers are aware of the existence of income protection, let alone whether there’s a pricing issue. There are opportunities for lots of confusion. Advisers and clients need to see income protection as important; understand how it interacts with state benefits and how to understand concept of risk.”
Towry head of product Ed Colyer says: “If income protection became more popular it would bring down the overall cost as the risk premium would be spread across more people.”
But the critical question is how long people can wait until they receive cover. “A policy that doesn’t start paying out until, say, 365 days after the claim is filed would be cheaper than one that pays out earlier but few can afford to wait that long,” he says.
Colyer says wealthy people are most likely to take out income protection today. “Politically, it would not look great to provide tax relief to wealthier people. Money would be better spent on educating individuals as to the need of taking out their own income protection arrangements, given that state provision is so poor,” he says.
Ellipse chief executive John Ritchie is not in favour of tax relief on income protection contributions. “Asking the Treasury to make it easier for us is the wrong way of going about it – it’s not in their interests. What we need to prove is the sheer economic wastage of people drifting out of work, sometimes permanently.”
To Ritchie, the workplace is an economic way to get to individuals. “I think that from the absolute economics of it and because of the deficit, the state will get out of paying long-term sick pay and will probably want employers to facilitate and co-fund it with employees,” he says.
Davidson Asset Management managing director Russell Davidson has concerns about auto-enrolment for income protection. “I doubt it will ‘fly’ as a popular idea with employers already reeling from the costs of pension contributions which for many have come in at higher than budgeted for due to low opt out rates,” he says.
He thinks financial education within the workplace would encourage people to buy the basic cover they really needed, possibly through group rates, with costs kept as low as possible.
Lakey points out that auto-enrolment for income protection will not help the growing number of self employed. “Tax relief could attract self-employed people. Advisers could mailshot them saying: did you know you can now get tax relief on this?” he says. “Two things are needed: automatic tax relief and a redesign of income protection plans to be friendly and easy to understand.”