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Long-term protection

While incapacity benefit has been increased for the financial year 2002/03, the new rate for long-term incapacity set at £70.95 per week represents a meagre 17 per cent of the national average weekly wage of £418.

This is one of many significant factors influencing attitudes towards state benefits. The Mintel Financial Intelligence report January 2002 shows that 77 per cent of respondents believed that state benefits on their own would not be able to support them should they ever need to rely on them due to illness or redundancy.

In addition, 80 per cent think that people should take greater responsibility for self-provision in times of need rather than relying on the state.

Recognition of the shortfalls in state benefits continues to support the sales of income protection benefit and mortgage payment insurance.

So far, products that include critical illness benefit have benefited to a much greater extent, evidenced by booming critical illness cover sales.

However, it could be argued that over the course of the next few years product popularity might well strike more of a balance between the two.

We are all now very much aware of the pace of advances in medical science that take place today. These advances are, of course, very welcome and to everyone&#39s benefit.

A side effect could be that some critical illness claims will move from being an invaluable financial injection at the time of a life-threatening event towards being closer to a windfall payment.

As a result we are beginning to see providers reviewing definitions and revising benefit structures to reposition the cover. With critical illness cover being repositioned as “life threatening” protection, it follows that mortgage payment insurance could receive more focus and this in turn could therefore increase IFAs&#39 opportunities.

If we look at the numbers claiming state incapacity benefits, according to Mintel there are around 2.3m. Of these, over 1m have been claiming for over five years. These statistics are resounding justification for long-term income protection.

However, it does raise an important aspect that advisers should bear in mind when recommending income protection/long-term mortgage payment insurance and that is underwriting.

The judgement to be made is to assess the long-term morbidity risk presented by a “specific” customer, unlike the more straightforward approach required for shorter-term mortgage payment insurance.

Underwriting requires particular attention and understanding. If we take the example of a 30-year-old couple and assume benefits of say 140 per cent of the mortgage, this gives us a monthly benefit of £1,200 over 25 years.

This translates to a potential liability at outset of around £360,000 (12 x £1,200 x 25). These two factors (liability and incidence of long-term incapacity) can help explain why it is important for advisers to provide insurers with details of their clients&#39 health, occupation and lifestyle to assist insurers to underwrite the risk.

By providing all this information up front, it enables the underwriters to assess the risk at first viewing and means delays are avoided and policies underwritten faster.

At a time when significant financial commitments are being made, like buying a new home, avoiding delays must be a top priority.

A relevant factor in assessing risk has always been occupation. As product development moves forward it is likely that this will increasingly become the case in relation to pricing and the definitions for disability. However, clarity for the client will remain a top priority.

When underwriting a life policy, there are certain medical conditions that are unlikely to require a GP report. But that is not the case when underwriting income protection/long-term mortgage payment insurance. So advisers need to build in extra time to take into account additional underwriting requirements.

This could include conditions such as arthritis (in all its forms and related illnesses such as spondylitis), glaucoma, the old favourite backache, slipped disc, trapped nerve and varicose veins.

As we look to the future, the continuing growth in the housing market, the Government&#39s desire to encourage self provision and people&#39s acceptance that self-provision is the way forward, these three factors could all increase the importance of mortgage payment insurance in your protection recommendations.


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