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Tom Baigrie on protection

Consumers and non-specialist IFAs alike often underestimate the amount of cover needed to protect properly against financial disasters. I think this is because we all try to quantify the need in terms of a lump sum which leads to huge errors of estimation and under-insuring.

When we buy family financial protection, what we are doing, most often, is looking to provide in the event of loss of income. As an extreme example, this is true even when we are protecting a mortgage as we are covering the loss of a breadwinner’ income (or the extra costs incurred in replacing a carer on commercial terms). After all, if we could be certain that their income would continue even after death, we would not need cover at all.

If you follow that point, then you will agree that the policies that are most often needed to protect families against financial disaster (outside of mortgage and IHT cases) are those which properly replace their income. There are three such in the market – family income benefit covering the consequences of death, critical-illness cover and income protection for disabilities. As many have been reporting of late, these covers are rarely set up and the reason is simple.

The quality of technical advice in this area has never been of particular concern to any but a few IFAs and specialist journalists. With impending regulation, the quality of advice will become more important although the FSA is determined not to make an issue of it – at the moment.

The market cries out for a product which covers all three needs at a sensible premium so that however one loses one’ income, one has the cover in place. As soon as that policy arrives, this market might well replicate the excellent sales growth rates achieved by the lump sum CIC product over the last 10 years.

The real reason for the excellent growth in CIC sales is that the bancassurers and mortgage brokers took a fancy to it. I would argue that was not anything to do with its quality but was because they needed to plug the hole in their income streams caused by the demise of endowments.

A more expensive rider than term insurance was needed to recoup lost income streams and thus sales exploded. This is not for one second to detract from the pioneering IFAs who raised our awareness about the very valid benefits of CIC or from those many critical-illness sales properly advised by IFAs and banc-assurers et al. It is simply to explain that rapid growth in sales happens when mass-market players decide it is time to sell the item.

The UK market would be infinitely better served if the mass-market players decided it was time to sell a good income protection product. There are two key things that stand in the way of this.

The first is the complexity of the underwriting of income protection and the second is consumers’ reluctance to shift from a nice-sounding 100,000 of cover to the rather more diminutive but much more effective 10,000 a year of cover. Sort out the latter and providers and re-insurers will simplify the former in double quick time.

I am not sure how many personal finance journalists writing in the national press get to this bit of the paper but I would urge those that do to highlight the need for your readers to rethink their approach to family financial protection. It is not about windfall lump sums, it is about continuing an income after a catastrophe.

Only when consumers get that will we start to close the protection gap in the UK because the key to closing that gap is not just selling more policies, it is making sure that the right policy is bought in the first place.

Tom Baigrie is managing director of Lifesearch

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