Income protection has largely been the Cinderella of the insurance sector.
According to the Financial Conduct Authority Financial Lives 2020 report, just six per cent of all UK adults hold IP.
There is a variety of reasons for this:
- In some minds, income protection was lumped in with the widely mis-sold payment protection insurance. This is a misconception.
- This Is Money notes: “Income protection has never been a best-seller – partly because it is seen as complex, more expensive and pays out on a monthly basis instead of as a one-off lump sum.”
- There has been a lack of enthusiasm from some financial experts themselves with Setul Mehta, head of business development operations at The OpenWork Partnership, telling the inaugural Income Protection Awareness Week conference held in September how “traditionally income protection has been overlooked by wealth advisers and clients alike”.
However, Covid has changed the parameters.
With millions seeing their take-home pay plummet due to lockdowns or furlough, more have become interested in types of insurance that protect their income.
A recent survey by LV found that nearly half of 25 to 44 year-olds were considering taking out IP as a result of the pandemic.
Debbie Kennedy, protection director at LV, told This Is Money: “The pandemic, lockdowns and furlough has caused a huge amount of financial damage to millions of households who are worried about maintaining a steady income. The challenges of the coronavirus pandemic and further lockdowns have forced people to re-evaluate their priorities.”
Meanwhile, speaking to Actuarial Post, Nathan Hill, at Swiss Re, said: “In the insurance industry, we often talk about consumer awareness and financial vulnerability. Given how much these issues were brought to roost throughout the pandemic, there has never been a greater need to help people join the dots between their own vulnerability and the products that can cover them.
“For someone who is unable to work owing to sickness or injury, income protection products can provide a vital lifeline by, not only meeting their financial needs, but also supporting them back into work.”
If you are in two minds about IP then ask yourself the following questions – for how long does your employer pay ‘sick pay’ – very few support their staff for more than a year; how would you afford your mortgage/rent, weekly groceries, utility bills, without a monthly income; what impact would there be on your lifestyle, family, mental health if you had to live on state benefits; do you have access to sufficient savings or help from family or friends if your monthly income ceases.
IP typically pays out between 50 per cent and 65 per cent of your income if you are unable to work due to illness or accident.
There is often a pre-agreed waiting (‘deferred’) period before the payments start. The most common are 4, 13, 26 weeks and a year. The longer you wait, the lower the monthly premiums.
Consumer champion Which gives the following example.
Say you earn £40,000, and you take out an income protection policy designed to pay 60 per cent of your salary, then you will get £24,000 tax-free over a year.
The cost of the policy is affected by your age, occupation, whether you smoke or have smoked, the percentage of income you’d like to cover, the gap until the policy begins paying out, the range of illnesses and injuries covered, and your health, weight and family medical history.
You never think a catastrophe is going to happen to you, especially the 20s/30s/40s with large mortgages and/or a young family … until it does.
Remember, as with the Scout motto, Be Prepared.