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In sickness and in health

IFAs can expect to be targeted by providers of income protection policies in the near future. Income protection is low on the list of products currently sold by most IFAs but that might change in the post-stakeholder landscape.

Given the withering of state provision and the corresponding onus on individuals to take care of themselves, income protection is likely to become increasingly relevant.

Unum is the market leader in income protection, with a share of 30 per cent. Director of marketing Eugene McCormack says the income protection marketplace is largely untapped. Most income protection is owned through employee benefits – few people own income protection on an individual basis.

McCormack is happy to admit that although income protection has been around for a while, it is at the relatively early stage in development.

Scottish Equitable will be entering the market with a product specifically for individuals to be sold through IFAs. Unlike Unum, ScotEq product development director Laura Shanks says its research show the product will be sold on the back of mortgages. McCormack thinks that stakeholder could be a conduit to income protection.

Income protection has a reputation for complexity because of the many variables that need to be taken into account to provide appropriate cover.

McCormack says: “It is up to us as product manufacturers to simplify articulation to enable IFAs to make clearly understood propositions.”

He says that income protection, unlike life insurance, is not a product that has become a commodity. It is an ideal product for the IFA to sell. McCormack says income protection could provide a welcome revenue stream at a time when many of the IFA&#39s traditional products disappear from the menu.

According to the Consumers&#39 Association, every year nearly two million people are off work for more than six months through illness or injury – 20 times the number of people who die before 65.

Some bigger employers, such as the NHS, pay staff when they are sick on full pay for the first six months and then half-pay up to a year.

Other employers will offer income protection as part of their employee benefits package – this accounts for the majority of policies sold. But after the first 12 months off work, most employees are left with no income.

Statutory sick pay is currently £163.60.20 a week for up to 28 weeks. Once that entitlement has passed, there is incapacity benefit at £163.60.20 a week, rising to £163.67.50 a week after a year off work.

The self-employed are entitled to incapacity benefit but not statutory sick pay.

Few clients would be able to maintain their lifestyles at these income levels. Shanks says, in advising clients of the appropriate cover, IFAs would have to make sure that the provision would dovetail with the client&#39s employment contract and any other forms of income that they might have.

An IFA would also have to consider the following variables. The deferment phase (after what period of incapacitation the protection kicks in), the level of cover needed,possible exclusions and whether to add a spouse on to the policy. An area of that needs careful attention is the different definitions of the various providers on what constitutes an inability to work.

One of the reasons for the low level of take-up of income protection has been the success of critical-illness cover which is often sold as an alternative. Scot-Eq, for instance, is laun-ching its life and criticalillness products in advance of an income protection product later this year.

Shanks says: “They should be seen as complementing each other, not as mutually exclusive. What happens if the sickness or accident incapacitates you but does not qualify under critical-illness cover?” The products can be combined so that critical-illness cover repays the mortgage, and other outgoings are covered by the income protection. 

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