Many years ago, in an early version of this column, I argued that government, and specifically the DWP (which was called the DSS way back then) was a competitor for anyone trying to get consumers to protect themselves properly, and a misbehaving one at that.
My rationale then, as now, is that consumers often feel they do not need life and disability covers because they and their families can in some way rely on state welfare benefits, even though these are inadequate and not guaranteed.
I suggested the DSS should explain its limitations and encourage people to take personal responsibility instead of allowing the public to remain in ignorance of the financial risks and consequences caused by death or disability.
It is surely time to reawaken that argument in support of the efforts of the Income Protection Task Force to highlight peoples need for IP and as a challenge to Iain Duncan Smith, the minister charged with reforming and simplifying welfare payments through the Universal Credit system.
The particular field on which we should throw down our gauntlet to the well intentioned minister and the DWP is that of state disability benefits. Simply put, their complexity, unpredictability and the false impression of adequacy allowed by the DWP makes it far harder for consumers to understand their needs and how best to resolve them.
The resulting public disinterest and suspicion has an obvious effect on the supply side of the market. It inevitably makes those who could market and arrange such policies less eager to invest in growing their sales in the space. It is far easier to go into the mortgage business, say.
Critically, the potential mis-selling liabilities one incurs in arranging IP are impossible to quantify because one cannot predict the ombudsman’s reaction to a case where the payment of benefits by an insurer causes the loss of benefits from the state.
The ombudsman has confirmed unofficially that such claims are not part of their normal round, perhaps because proving what the state would pay out is so very hard to do, but these days we need better protection than that from retrospective reviews and there is one aspect that really has the potential to cause pain and would seem to be relatively easy for Iain Duncan Smith and his team to fix.
Let me explain. While IP benefits were wisely excluded from the income tax net by the previous Conservative government, an anomaly remains in calculating its effect on ones entitlement to means tested welfare benefits.
Under Universal Credit a payment from an employer or group IP scheme will be treated as earned income in calculating welfare benefit entitlement, so for every £1 over your Household Earnings Allowance you receive in IP benefit via your employer, 65 pence of state benefits is lost.
Fair enough, but what’s wrong is that if the IP payment comes from a personal policy you arranged yourself, it is treated as unearned income and £1 of benefits are lost for every £1 of IP pay out. Madness
All the DWP needs to do to greatly reduce the chance of honest IP sellers doing anyone any harm is to treat income from personal and employer linked income protection insurance the same way. Seems stroke-of-a-pen stuff to me.
After that, the minister could do an honest politician’s job and describe clearly the limitations of state benefits and urge consumers to arrange their own more reliable and predictable protection. Were insurers to then start actually marketing their much needed products to consumers (imagine!), then the demand side of the market would improve and sure as eggs is eggs, the supply side would rise to the challenge.
Tom Baigrie is chief executive of Lifesearch