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Income protection must be the priority product

“Prioritise Income Protection provision!”…insist group risk insurers. “Ah but”, say the adviser community, “We are comfortable doing pension, mortgages and investments – this protection stuff is too technical, especially that group risk stuff”.

Well maybe it is time for a rethink. What is a pension other than a deferred income? Why aren’t employers and employees protecting their incomes whilst they are at work? What about the potential impact upon retirement income?

By covering pension contributions under a group income protection scheme both the pension scheme and employee can have a waiver of contributions in order to continue to provide employees with a decent income in retirement, as well as in their working life.

Why do organisations and individuals pay, for example, 10 per cent or 15 per cent of salary for a pension that could benefit them in, for example 26 years rather than 0.5 per cent (limited benefit payment plan) to 1.5 per cent for something that could benefit them in 13 or 26 weeks?  This seems crackers financial planning.

Well of course the perception of both employers and employees is that ill health or disability will never happen to them, but, bad news as 2.7 million people claim state health benefits as they cannot work, and, of these 1.23 million have been claiming for more than five years – at a reported cost of £24bn to taxpayers in 2009/10.

If the worst should happen surely the state will look after me? Well let us forget the potentially massive reduction in income that state benefits provide vs. earned income and net pay and focus on the chances of getting that benefit under the new state benefit testing regime.  Did you know that of the 195,500 new claimants applying for benefit between October 2008 and February 2009 that of those audited 36 per cent were found fit for work and therefore not eligible and 38 per cent ceased claiming before the assessment was completed? Furthermore 11 per cent were eligible and perhaps could work in the future, 5 per cent would most likely not and 10 per cent were under assessment. So, what would happen to you if you were off sick?

How odd a populace are we that we quibble over our car and/or home insurance premium(s) but seem loath to pay a similar amount to protect the very income that pays for that insurance, the mortgage, the social life, the investments etc?

So in summary please forget about pensions, mortgages and investments until you have protected the income that funds them. State benefits can provide relatively little, are difficult to get and without adequate income protection provision you can forget about life as you know it.

Paul Avis is sales and marketing director at Canada Life Group Insurance.



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There are 11 comments at the moment, we would love to hear your opinion too.

  1. The pension funding problem could be solved if the government were to reintroduce Waiver of Premium as an integral part of Personal Pensions. Jeff Rooker should be strung up for having presided over its removal.

    The problem with Income Protection is that most people consider it too expensive, which it is because it’s so difficult for insurers to make an underwiting profit out of it. But personal accident plans are cheap, so one of those in conjunction with (better still built into) a long deferred period Income Protection could make it a more manageable proposition.

    Just banging the drum and saying that IP is the product that people ought to have over all others isn’t going to change anything.

  2. Paul you will be delighted to learn that a good yardstick for IFAs to follow, is the P.E.P.S.I order to financial planning. To the unitiated few, this is Protection, Earnings, Pensions Savings and Investments. As Julian has highlighted most people perceive this cover to be too expensive and some may say too exclusive. What is needed is a more competitively priced product that is easily understood by the public and one that they feel will be essential to their needs. Is that so difficult!

  3. Income Protection is not very good value for money. It is very very expensive unless you go for the six month option. If you do have six months off work, you have probably had a Critical Illness or died. so why bother.

  4. Yes PHI is hard to explain, yes PHI is not sexy, yes it is a pain to have underwritten but as the chap at Canada Life says it is the most important product because without income clients are nothing and all the other plans fall down.

    Just because it is a difficult product to advise on does not mean it is not the right product. In the right circumstances clients are mad not to have it and Advisers incompetent and/or lazy in not talking about it

  5. Couldn’t agree more with sentiments of this article; protecting income during disability should be at the core of any financial planning. Despite suggestions to the contrary, def 26 weeks Group IP cover is relatively in-expensive on the grand scale of things and, unfortunately, there are plenty of people that survive beyond 26 weeks with a disability that prevents them working.

  6. I agree that IP should be a number one priority but clients (and advisers) have less confidence in it than CI. With CI you get a black and white definition, IP is often too vague. I have seen more seemingly unjust (even if they were within the letter of the contract) declines for IP claims than CI, at the end of the day the client might have been better off paying for CI. Also it can be pretty inflexible, complex (state benefits included / excluded etc..) and if you have had a bit of wind in the last ten years your are likely to get rated.

  7. Comment from Anonymous | 16 Mar 2010 5:36 pm

    “Income Protection is not very good value for money. It is very very expensive unless you go for the six month option. If you do have six months off work, you have probably had a Critical Illness or died. so why bother.”

    Oh dear – why bother ?? – I can’t see you advising/selling much income protection in the near future – much to the detriment of all of your clients who may need it — if you only told them about it !!


    lots of people are driving their cars with extortionate insurance premiums and they pay the ‘compulsory’ insurance – yet they could pay for an income protection policy for a lot less if someone helped them to be compelled to – but hey it’s all a matter of priorites.

    Dear Mr Anonymous why do you ‘bother’ getting out of bed in the morning !! – Your attitude is a disgrace to everyone of your clients because your hoping they all die before they could have claimed on their non existent income protection plan and then there will be nothing on your conscious !!

  8. I agree almost completely with the article above, and therefore disagree with the comment that IP isn’t good value for money – especially if it is provided by your employer! even for individual IP unless the client is a smoking female in a high risk occupation, the prices are often comparable to ASU/MPPI cover, if not cheaper

  9. IP is not difficult to explain – it pays upto 60% of your lost income if you are unable to do your job due to a sickness, accident or disability. What is so hard about that? It should be sold in conjunction with CIC as it then covers all angles.
    Yes, there is ‘own occ’ and ‘any occ’ etc. but that’s not dificult either. Choose the deferred period that suits their emploment circumstances and as Kevin Carr says, it’s often cheaper than ASU and the client get’s longer term cover.

  10. Matthew Harman Smith 18th March 2010 at 9:10 am

    “it pays up to 60% of your lost income ”

    This was about Group, which can pay up to 75% or even 80%.

    And I think this emphasizes how advisers do not appreciate how Group Income Protection can be a much better product than individual. Which I think was part of the point of this article.

  11. IP is not expensive – this notion seems to be pravlent yet it is simply not true. A number of Friendly Societies have devised affordable plans which are proving very popular with my clients.

    We must lose this fixation with proce and look at value – if we are focused on price how will the client learn any different?

    Also, I do not agree that CI is more black and white than IP. In fact, it is the opposite as long as the IP plan is own occupation and not some activity based definition.

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