Despite all the marketing hype, most people’s buying patterns are pretty simple at heart. When faced with a purchasing proposition, the chief criteria that people use to help them decide are typically – do I need it? and how much does it cost (or can I afford it)?This is why selling long-term income protection is such a tough nut to crack as no one likes to think they will need it and it can be seen as expensive. On the life side, income protection cover generally loses out to term insurance and critical-illness cover. We all know we will die some day, and the growing public concern over obesity and health issues have probably done sales of critical-illness cover no harm. IP’s cousin on the general insurance side, ASU, is much easier to sell. It is cheaper and as it directly covers mortgage repayments, it seems more probable to consumers they may need it so you are offering something they can more easily see as meeting a potential future need and at a price they can, in most cases, eas- ily absorb. Add in the fact that commission over the life of the policy is usually higher for ASU than IP and you might think you were looking at a classic win-win situation. The customer is happy because they have got some affordable cover and the adviser is happy because it is a quick and straightforward sale earning some decent commission. The net effect of all this is that IP bumps along the bottom of all the protection sales charts, outgunned by its more popular life colleagues and overshadowed by its more accessible GI counterparts. Something has to come out at the bottom and no one would want to see falling sales of life or CI cover but while ASU is a perfectly reasonable product meeting a need in the market, would anyone argue that IP is not a much more satisfactory protection product? ASU cover only lasts for 12 or, at most, 24 months, IP will provide cover for the long term and also provides a big proportion of an individual’s entire income rather than being pegged to just mortgage payment. Practically no one could survive on their ASU cover payments alone, whereas with IP they should (with some belt-tightening) be able to do so. There are other issues with ASU too. The fact it is underwritten at the point of claim rather than at sale means a client could find their claim refused if there is a pre-existing condition, for example. ASU also does not offer any kind of rate guarantee. On the other hand, there are some shortcomings in IP. The lack of unemployment cover is probably the main one and the relatively low commission it offers compared with critical-illness cover is another factor. Are there any solutions to this? Might we in the future see a cross-breeding of products so that IP and ASU meet somewhere in the middle? A mid-price product providing cover for a significant number of years with guaranteed rates and offering decent levels of commission? It is a possibility, although one suspects that such a product could only supplement rather than replace existing ASU and IP products. To an extent, it is already happening some providers for example offers mortgage income protection cover. This works the same as IP but the cover it will pay out is linked to the mortgage only and not to income. There are other ways of bridging the gap. For example, one way of keeping IP more affordable while retaining the short-term benefits of ASU is to sell IP with a long deferred claim period. Selling IP on a 52-week deferred claim period and combining it with ASU cover with a four-week deferred claim period provides your client with comprehensive cover which can often be significantly cheaper than selling straight IP with a short deferred claim period. Here are two examples of the savings which can be made. They compare IP with a 52-week deferred claim period taken with AS cover on a four-week deferred claim period, compared with IP taken with a four-week deferred claim period. In our experience, only around a third of IP cover is currently sold with a 52-week deferred claim period. Scenario 1 Jane Sample is a non-smoker requiring 750 a month to cover her mortgage and 250 for additional costs. Her date of birth is 04/06/1975. She works as a marketing manager and earns an annual income of 35,000. She requires cover on a level basis at guaranteed rates until she is 55. Accident and sickness cover and income protection cover 49.85 a monthIncome protection cover60.73Difference per month10.88 Scenario 2 John Sample is a non-smoker requiring 1,250 a month to cover his mortgage and 250 for additional costs. His date of birth is 29/09/1955. He works as an accountant and earns an annual income of 50,000. He requires cover on a level basis at guaranteed rates until he is 65. Accident and sickness cover and income protection cover 110.43 a monthIncome protection cover155.50 a month Difference per month 45.07 With a menu-based proposition, it is easy to arrange the two sales simultaneously and the two insurances can sit alongside each other in one account.
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