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Tom Baigrie on Protection

The ombudsman has been quoted as warning IFAs to be cautious over sales of income protection. IP is more of a problem than critical illness. IP needs to be sold and explained carefully because it is not as clear cut as life insurance, because loss of income through disability is not as clear cut as death.

What the ombudsman did not say is that income protection should not be sold. In truth, it should be sold far more than it is, but because the majority of current (non-IFA) distribution channels are pretty useless at explaining things to customers properly and are pretty good at making a sale, any increase in (non-IFA) IP sales is likely to cause more work.

To be insured properly, one should have both covers, and life cover too if one has dependants. But all three together have overlaps and challenge most budgets, so some prioritisation is normal. Life insurance is the cheapest and everyone wants it so it should be the primary sale. However, the next sale must be the policy that best covers you if you do not die. This is the important bit. If you are looking to protect yourself against the financial consequences of non-fatal disability, you can accurately define your risk by your loss of income or additional costs (the latter would, for example, apply to a carer). IP covers the lost income need in a fully comprehensive fashion. Of course, it does not pay out if you can’t get a job after you recover, nor does it pay out if you were not earning the income you said you were; when you claim. But those sensible truths are easy to explain in a proper advisory sales process.

CI is easy to explain but not if you mention that its total and permanent disability clause has around a 50 per cent rejected claim rate. Of course, 100 per cent of CI claim reasons that cause longer-term loss of income due to disability are covered by own occupation IP. So IP should be the first consideration, except for those who just cannot get it affordably or without serious exclusions because of their occupation or health history. It should be the first choice where possible and considered each time CI is sold.

IP is not often considered at all. This is because the majority of protection sales are now not made by IFAs but by non-advisers. IP has slipped out of fashion which means that even IFAs find it hard to sell. The challenge is to bring it back into fashion as, despite the fact it is less profitable to the adviser, for many consumers, it is the best choice.

That means the newer major distribution channels will not sell IP. Only those who know what they are talking about and put their clients first can spend the time needed to properly document and advise on the sale. That commercial advantage is the second reason why IFAs should be keen on IP. The first reason is that it is the right product for many customers wanting to protect themselves against financial consequences of non-fatal disability.

Tom Baigrie is managing director of Lifesearch


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