Every year, I read four or five well reasoned articles lamenting the low take-up of income protection insurance. The authors recount the genuinely excellent benefits of IP and argue advisers should focus their efforts on this form of protection, which the experts accept as the most important of them all.
I have made numerous attempts to persuade my clients they should avail themselves of IP and I have had some success but there are still far more clients without protection than with it and I suggest it is time we seriously rethink the design of these plans.
Let us consider those disagreeable aspects that demotivate both consumers and advisers. I frequently hear that everybody should have IP but, let’s face it, not everybody qualifies. Not every plan pays an agreed sum, merely up to an agreed percentage of provable income at the time of a claim. Whether or not state benefits are deducted from the claim is down to the insurer. Activity-based definitions are unfair and indefensible and would surely fail any treating customers fairly inquisition by those at E14.
Perhaps we need to challenge some of the long-standing and comfortable design features we seem to consider sacrosanct.
Consider the rule that the income paid should be limited to a percentage of pre-disability earnings. This limit is applied to ensure there is a financial incentive to return to work, yet it is also responsible for claims being downsized with resulting arguments.
In a world where reinsurers assert that every risk can be priced, why don’t we remove this limitation? We already have advanced claims management techniques and these should ensure that any malingerers are fished out at an early stage.
This would avoid the unfair nature of the self-employed suffering due to the fiscal wizardry of his accountant. It would also open the door to those employees that enjoy staggered sick-pay benefits, something that often makes it impossible to arrange a simple or sensible plan.
Why not ignore the impact of state benefits, which are increasingly being denied, and also the requirement that a change of occupation must be advised? These are tangential and serve little useful purpose.
We can also do away with activity-based definitions that disallow payment to those unable to work and serve to bring the product into disrepute. It is acceptable for the unemployed but should be immediately discarded for the employed and self-employed.
Here is another thought – the CIExpert knowledge base includes a catalogue of historic critical illness plan wordings, among which is the famous Daily Mirror CI plan. Available to Mirror readers in the 1990s, this plan included a mere seven conditions but came with a foldout descriptive brochure inclusive of application form.
The application asked just four health questions and, naturally, was priced on the basis that many applicants with an interesting medical history would be able to obtain a policy.
Was this a good plan? In terms of comprehensiveness it was poor but in terms of appealing to consumers it was superb. Merely four questions, only seven conditions to explain and a lack of printed guff – a surefire recipe for consumer interest.
Of course, the biggest boost would be for the Chancellor to recognise how the mass take-up of IP plans would assist the UK and agree to introduce tax relief at source, as with pensions.
Alan Lakey is partner at Highclere Financial Services