Advising on income protection

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  • 34 mins 20 secs

In this Akademia module, we take a look at what the income protection gap is, misconception about the idea vs the reality of insurance prices & how mental health and working conditions are having a big impact on UK productivity. Joining Mark Colegate to discuss, we have:

  • Robert Harvey, Head of Insurance, Drewberry
  • Jennifer Gilchrist, Protection Specialist, Royal London

Channel

Protection
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PRESENTER: Income protection is a product that advisers can be reluctant to sell, but the need for it among clients and consumers remains great. In this Akademia session we’re joined by Robert Harvey, Head of Protection Advice at Drewberry, and my Jennifer Gilchrist, Protection Specialist at Royal London Insurance. Let’s start by looking at the learning outcomes that they’ll be covering: first advisers and consumers’ views on the protection market and income protection; then understanding the role that advisers play in income protection; next how to dispel the myth that protection, income protection are complex and a difficult advice sale; then where income protection fits within a client’s advice journey; and finally talking points for your client about the need for income protection. Well when they came into the Akademia studio I began by asking why they thought income protection is so important.

Jennifer, why is income protection so important and what exactly is the so-called income protection gap?

JENNIFER GILCHRIST: For me income protection is the most important protection product. It’s an insurance that pays out if someone is unable to work and sick. Normally your employer will stop paying you an income after you’ve been off sick for so long, and income protection then kicks in to pay you an income so that you can pay your bills. For me, it’s really important. It’s the most important of all the protection products that we develop and sell. But unfortunately it’s probably one of the most, least bought by consumers today, maybe because they don’t actually know that it exists.

PRESENTER: And Rob, from your perspective, I mean would you go along with that, and can you give us some idea of how big the income protection gap is?

ROBERT HARVEY: Yes, I completely agree. I think with the view that it is probably the most important protection insurance product, insurance product full stop that I think most UK households, individuals require. Unfortunately, we do have a significant protection gap in the UK. Income protection is really massively undersold. And there’s a whole number of factors that give rise to that. The protection gap in the UK is significant when you look at the number of protection, income protection policies sold. It’s miniscule compared to the actual overall need of UK individuals when it comes to protecting their income, protecting their households with income protection insurance and similar protection products. So yes absolutely would agree with the points made there that it is a crucial product and unfortunately at the moment presently undersold.

PRESENTER: And is that because people aren’t buying insurance at all, or they’re buying other kinds of insurance such as critical illness or term assurance on a mortgage, rather than income protection per se?

JENNIFER GILCHRIST: I think if you look at some of the stats in the industry between 40 to 50% of consumers will buy life cover. And I think the reason for that is it’s accessible. So a consumer can go and buy that from the internet themselves. There’s also critical illness insurance. Much less people buy critical illness and income protection insurance. They’re well less known, they’re a bit more complex, and actually to buy them, a consumer to buy them themselves is a bit more difficult. And that’s where I think an adviser, a financial adviser that can give you advice on what’s the best for you can help actually really position in your mind what it is you need. So it’s easy to buy life cover, and it sounds really straightforward to a consumer, but then maybe you need a bit of help for critical illness or income protection to make sure you buy the right one or the right kind for you.

PRESENTER: I wanted to get just a bit of a sense of what the chances are of somebody needing income protection. So, Rob, have you got any stats or some ideas of how likely people are to be off work for a substantial period of time when they’re not earning?

ROBERT HARVEY: Yes, I mean the chances of, unfortunately there’s a slight inversion in terms of people’s perception of the risk they face and the reality of the risk that they face. And so when you look at the products sold, income protection is right at the very tip of the pyramid, very few policies sold. Critical illness sits below that and then there’s a whole vast swathe of life insurance products sold. The reality of the risks that most UK consumers will face is an inversion of that in terms of the risks that they face during their working life or during the period of time that they have a mortgage liability or dependent children. So the risk of death is the least likely even to happen and then the chances of serious ill health are far greater.

I was looking at some statistics recently published by the Department for Work and Pensions around long-term sickness absence, and I think some research they published this year showed that in the last 12 months one in 25 people, so not an insignificant number, one in 25 people had experienced long-term sickness absence in that period of time. And long-term sickness absence for this was defined as being off work for more than four weeks in a single period of time. There’s a whole range of other statistics out there published by insurers, published by the government as well, that show that there is a significant risk of UK workers experiencing sickness absence.

Now, when we look at statistics, broadly speaking there’s a positive trend in terms of workplace absence declining, there does seem to be an overall trend in the increase of absenteeism, and I think there’s a story there in terms of what’s driving that. I think there’s an element of the state pulling back from offering as much support to people, employers increasingly aren’t offering the range of benefits that they may have done in the past, and so more UK workers are experiencing ill health, but turning up to work and sort of ploughing through. I think there’s a big piece as well in terms of mental ill health playing into that.

So increasingly people experiencing mental ill health, more aware of it and conscious of it, but trying to plough on and turn up to work. And I think that feeds quite nicely into this message of the importance of income protection, because those individuals don’t have a solution to fall back on, so they’re forced to turn up to work. And that’s had a knock-on impact as well in terms of UK productivity. So we have a massive problem in the UK around productivity, which has been declining steadily over the last few years, and I think a big part of that is this issue with people experiencing ill health but turning up to work. But certainly in terms of actual workplace absence it’s still very significant.

PRESENTER: Well, there’s some facts and figures around the amount of time people are likely to be off work for. But, Jennifer, what I’d be interested in, and I know you’ve done a report on this, The State of the Protection Nation recently, but what’s the gap between what the end consumer thinks is likely to happen to them, some of these risks, and what the reality of those risks are? Because there seems to be, from your research there seems to be a bit of a mismatch there.

JENNIFER GILCHRIST: Yes definitely. I think if you ask consumers they think that you’re much more likely to die than be off work sick. So you’re twice as likely to die as be off work sick. But actually the actual probabilities of that happening to you is the opposite way around: you’re much more likely to be off work sick for more than two months than you are of dying. And again consumers think as well that they’ll die before they get cancer, heart attack or stroke, so serious illness as well. Very much they see the probability of you dying as their top reason for actually going out and seeking insurance. But if you look at what actually happens in practice and what you’re going to face in life, it’s you being off work sick. It’s the opposite way around to what they think.

PRESENTER: But, Rob, might one reason that people don’t have the insurance be that they’ve actually got a fair amount of money that they’ve built up themselves to cover this sort of eventuality, is there any truth in that?

ROBERT HARVEY: Yes, it’s I think a view that unfortunately perhaps a lot of UK consumers have, but the reality is far from that. So we commissioned some research at Drewberry back in 2018, where we looked at the state of UK households and that protection gap, and their ability to weather a period of time out of work due to sickness absence, and we found that roughly over half of those questioned had broadly enough savings to sustain them for up to three months, but beyond that they would then struggle. An interesting stat as well from that research was that roughly about a fifth of those questioned only really had sufficient financial provision to be able to sustain themselves for about a month.

And I think that’s quite interesting, because it does relate back to that research that the DWP published this year, that actually one in 25 people are experiencing long-term sickness absence of more than for weeks, and from the research we have done about a fifth only have sufficient provision to sustain them for about a month. So some pretty scary stats when you actually start to drill down into the ability of most UK households to be able to actually sustain themselves in the event of the main earner experiencing long-term sickness absence and the inability to work and earn an income.

PRESENTER: Well, turning from those stats, which are really quite stark, through to some of the reasons perhaps that people aren’t buying the product, I mean might one reason be the price of it and people’s worries about how complex the underwriting is? I mean if you’re going to pay out if people are off sick full stop, I mean presumably you’d want to know quite a lot about them.

JENNIFER GILCHRIST: Yes we do, and income protection I must admit is one of the products where we do ask a little bit more medically. So it might take a wee bit longer to actually get a policy on risk. But the reason for that is much because we actually expect you to claim more often from this type of product than other ones. From an expensive point of view I think consumers in general think insurance is expensive. But having done quite a bit of research this year and previous years as well, when you actually get consumers to say what do you mean by expensive, or how much do you think this will cost, a recent survey, consumers were actually quoting prices three times the actual cost. So I think they have a figure in their mind. But I think if they went and they looked and sought advice, they would actually be quite pleasantly surprised that it’s not as expensive as they would think.

PRESENTER: Could you give us an example, I mean obviously policies depending on circumstances will differ, but is there a ballpark figure as to what people think income protection costs and a ballpark figure as to what it does cost?

JENNIFER GILCHRIST: Yes, well because you have different types of policy, you can start off with for example more budget cover where you don’t have as much money to spend, right up to getting full income protection, if you want to call it that. And the prices can range, I mean if you’re maybe 30 the price could start at under £10 a month, right up to if you want to provide more cover then you could be paying £30-40 a month for this more comprehensive cover. So actually because of that range there’s choice for consumers. It’s not one size fits all. And what we’re trying to anticipate is how much they can afford to pay. And the cheaper policies may only provide them with income protection for example for two years. So if they become sick we would pay out after a certain period of time for two years. That gives them a bit of breathing space. And maybe that is the right price for them at the time, but protection is very much about understanding how your circumstances change.

So if you start with that product, then what we’re anticipating is as you get older, you change job, you get promoted, that you’re able to maybe get better more comprehensive cover as you go. So protection isn’t just you buy it today and it lasts until retirement, you can go back, and it can be adapted with your circumstances.

PRESENTER: And, Rob, you’ve mentioned earlier the issue of mental health. Do these policies pay out if somebody has a mental health issue? Because I can see someone would say well if you’ve had a stroke or a heart attack, they’re quite easy to quantify. They’re sort of diseases or circumstances that people are used to; mental health somehow is perhaps, perception is that’s a little more, I hate to say subjective but it’s not as easy to tick boxes as to exactly what’s happened.

ROBERT HARVEY: It’s a really interesting point actually, because when you look at the statistics two of the most, two of the common reasons, the most common reasons for UK workplace absence are mental ill health and musculoskeletal problems, back pain, this sort of stuff. So you take those two illnesses, conditions, that people are living with that are causing the greatest, having the greatest impact on workplace absence, they’re two conditions that broadly speaking wouldn’t be covered by a critical illness insurance policy. Mental ill health would be covered in a really extreme form on a critical illness contract; similarly back pain really would only be covered if somebody had experienced say paralysis or something like that following an accident; so two conditions that are not covered on a critical illness insurance contract, but absolutely would be covered on an income protection policy.

Of course there’s an element of underwriting and assuming that somebody hasn’t had prior symptoms and this sort of stuff, which may give rise to an exclusion; but if somebody had experienced a period of mental ill health following say a bereavement or what have you, then income protection policies absolutely will pay out for that. We have direct experience at Drewberry of clients that we’ve arranged policies for claiming on those income protection plans for a whole range of mental ill health related conditions. We’re talking things, chronic fatigue syndrome, depression, anxiety, this sort of stuff, so they absolutely do cover those conditions. But I think it’s a key point that on the product at the moment that covers ill health that’s perhaps sold most frequently in the market, critical illness, the two things actually aren’t covered at present really in any particular form.

PRESENTER: But, Jennifer, do the public trust insurance companies to pay out?

JENNIFER GILCHRIST: I think this is one of the things that does come up and cause us some concern at times, because I think there is a feeling out there from consumers that insurance policies don’t pay out. And fortunately in the protection market I think that is not the case whatsoever, and possibly consumers are more thinking about more general insurance, like car insurance or home contents, and all insurances are sort of thought that they won’t pay out. But actually for protection we do have very high rates of payout on claims. It’s one of the things that we are very proud of that we actually do pay claims and that we go the extra mile. We really want to be able to support consumers when they are most in need. And obviously at claim time that is exactly what’s going on, we want to pay claims.

PRESENTER: And, Rob, when you look at claims patterns, I mean one are most insurers good at paying out, and secondly if there are areas where they don’t pay out, are there some obvious places as to why that has happened, and actually you could argue that’s a case of say more consumer ignorance than perfidious behaviour on the part of the provider?

ROBERT HARVEY: We’ve seen a vast improvement in the last few years when it comes to transparency from insurers around payout statistics. So not only do we have most providers offering protection insurance publishing claim statistics annually now, increasingly insurers are also putting together reports that detail not only the reasons why they have paid claims, but the reasons for having declined claims as well. And there is a huge amount of, I’m certainly finding like I said increasing transparency from insurers. And the payout statistics for most insurers now are in the mid to high 90s for these sorts of products. Income protection can have a slightly lower payout rate, say, from the life insurance where it does tend to be a little bit more black and white.

The reasons that we typically encounter and that we see from insurers when it comes to declining claims, it does tend to be non-disclosure by the applicant, and that may be either innocence or deliberate, so non-disclosure tends to be one of the main ones; income protection, there may be times as well when somebody perhaps doesn’t actually meet the definition of a claim, that they may for example get better and return to work before the end of an initial deferral period and this sort of thing. But by and large as I said there is a huge amount of transparency, and actually if consumers are furnished with that information they’ve got a good idea of the claims payment record of any particular insurer, and where the common reasons for paying claims, and common reasons for not paying claim.

PRESENTER: Jennifer, we talked a lot about the consumer, but you mentioned earlier this is a product that advisers sell. So when you look at the attitude of advisers to income protection, how confident they feel about the market at the moment, what sort of feedback are you getting?

JENNIFER GILCHRIST: I think there is a group of advisers who are very comfortable with the product, and how they can describe this to their clients, and are very comfortable. Rob and his team obviously at Drewberry are one of the advisory groups that are very comfortable and advocate income protection as being very important; but other advisers who are not quite so comfortable with it and confident in selling it, because it is much easier to provide advice on life cover and potentially critical illness, and income protection is maybe seen sometimes as a bit complex and a bit of a more difficult sell.

PRESENTER: Well, Rob, tell us a bit about Drewberry, why is income protection so important to your proposition to clients, where does it fit?

ROBERT HARVEY: Yes, so we really see income protection insurance as being really the cornerstone of a sound financial plan. So for us it’s not secondary to the advice we might be giving a client in relation to arranging life insurance for a mortgage or perhaps having a conversation around retirement planning or wealth management, it really is, it’s central to that plan. And as a business, Drewberry, as an advice company, we really place income protection front and centre of that conversation with the client. We recognise that there is that advice gap in the market, or there has historically been an advice gap in the market, where when for example banks pulled out of financial advice and consumers really were left with those advisers that were still the market or turning to price comparison sites and the like in order to arrange these products that actually there was a need for people to speak to experts who really understood these products, and could tailor a solution to that client’s needs. And so I think that the role of the adviser here is really key, and I think it’s important that advisers wake up and recognise that income protection and protection products I’d say more broadly really need to play much more of a central role in the financial planning that they’re carrying out with their clients.

PRESENTER: And what do you look for in a good income protection policy, and how broad and deep is the market for you to advise on? I don’t mean in terms of consumers, but I mean in terms of the product providers and what they have.

ROBERT HARVEY: Yes, so I think in the last couple of years we’ve seen some vast improvements in terms of the products on the market. I remember when I came into the industry a number of years ago, you still had a number of insurers that offered a fairly good contract, you had some that had various different aspects to their plans that you might want to try and avoid. There for example might be things like the way that a claim might be assessed, typically we’re looking for a policy that will provide own occupation cover, and a few years ago you still had plans on the market where they may be using some alternative assessment criteria, suited occupation, this sort of stuff. But broadly speaking the quality of all of the contracts now have improved significantly. So actually I think we’re in a really good place where consumers and advisers have access to a really good range of products.

The role of the adviser then is really understanding their client and tailoring a solution from that range of products that’s going to be appropriate for that individual. I think something that’s becoming really important for us as well are some of the range of additional benefits and value added services that are included in those contracts. That’s increasingly I’m finding becoming a key comparison point when looking at different products. Looking at ways in which that insurer not only supports that policyholder when things go wrong and they have to claim on that policy, what support might they provide at any point in their life, maybe they give access for example for that client to second opinion services or counselling and physiotherapy, these sorts of things. So increasingly the conversations that we’re having with clients are focusing on some of those services, because the core contracts are broadly OK from most providers. There’s still some nuances and differences, and you will of course tailor a plan that’s appropriate for that client in terms of the basics, but increasingly it’s those additional aspects to that cover, those small intricacies, the bits that perhaps consumers aren’t aware of, and that’s where the adviser plays a really crucial role is understanding some of those nuances and then devising that solution for that client.

PRESENTER: So it’s that question of how, the extent to which you can take these products and bespoke them for your client-

ROBERT HARVEY: Absolutely.

PRESENTER: -is the key element there.

ROBERT HARVEY: Absolutely yes.

PRESENTER: And how easy is it do you think Jennifer for an adviser to demonstrate they’ve added value to the client?

JENNIFER GILCHRIST: I think just as Rob has said very much about they’re going beyond just a basic policy. It’s not just the financial help that policy can provide; it’s the added value services that consumers on their own might not recognise. And especially with income protection playing right into mental health, bad backs, being the most reason for claim, the actual support of counselling and physiotherapy is a must almost for that type of policy. Because it’s not just that what a provider’s trying to do is provide that financial support, they want to go beyond that. So if there is a problem they provide support like counselling if there is a bereavement and they want to support them through that bereavement, but also that these services can be accessed not just with a claim and that they can be there in supporting a family, so it’s not just even the life assured as such, it’s actually the whole family if they’re going through a shock or something has happened and they just need a bit of support. Not actually that they’re going to be off work necessarily, but they just need some extra help, which could be emotional, practical, something that might not actually be financial.

PRESENTER: You’re talking there about how you can reduce the effects of something after it’s happened, do you ever see yourself or your fellow product providers getting into a world where you’re more in the prevention game? So you mentioned things like bad backs, and it’s going to sound really trite if I say if you do yoga once a week your percentage chance drops, therefore we’ll reduce your policy, your premium. But can you see yourself getting into that game of encouraging what you perceive to be better behaviours that means you’re less likely to claim on the policy in the first place?

JENNIFER GILCHRIST: Yes, I think we can actually see the market already moving into that sort of direction. So primarily when we first started the emotional and practical support, it was very much centred around claims. Where we’ve now moved to now is opening that out and providing the support services before claims. And if the family have, just need some support at other times, not meaning that they’re going to be off work. But I can see that already happening in the market where other services are being added. So it is, it could be very much into the prevention side of things. And there will be customers that will engage with these things and be really happy that they’re there; maybe other customers might not. So it is about trying to have services that we feel that the customers will use and will help them on their, just continue life.

PRESENTER: And, Rob, you mentioned there that the products and policies have moved on a lot in the last couple of years, but if there was anything you’d still like to see product providers do, what would it be?

ROBERT HARVEY: Yes, it’s a good question. I mean I think to develop that point that I guess increasingly I see these as almost being a wellness proposition. It’s the income protection payout that somebody receives if things go really wrong and they are forced to take time off work is almost incidental to a range of other benefits and services. I think we’re heading in the right direction, so a lot of providers now offer access to counselling, physiotherapy and the like. I think one really neat innovation a lot of providers are doing now is giving policyholders access to private GP services that they can use. It might be a virtual smartphone based app, where they can access a GP on demand. And I think when you look at the strain on the NHS with GP services this is actually a really valuable service. There’s a few providers out there at the moment that offer that, but it’s certainly something that I see as a real opportunity there for providers to offer benefits like that that really put value in the hand of the policyholder.

We’re also starting to see as well, and I hope this is something that takes off, we’re starting to see providers as well now include benefits where the policyholder can claim if their children are sick. So an element of critical illness cover or similar for the policyholder’s children. And I think thinking about those families and the like where what impact would the illness of a child have on that household and the need for that parent to take time off work to care for that child, the financial impact for that can be very serious, and whilst there are to a certain extent some carer benefits and things like that included on policies, I think there’s a bit of work there to do from providers in offering services in that realm as well. So some of these things I think looking at ways in which that contract can go above and beyond, and provide real value to that policyholder. Like Jennifer said to (a) prevent a claim from happening in the first place, but also cover some of those events that presently may not necessarily fall within the overall remit of an income protection policy.

PRESENTER: And just quickly move on to our final topic for today, are there particular times Jennifer where consumes are more responsive to the idea of income protection than others? So if you’ve got a client, you might say well I could talk to them about it any time between the age of 25 and 80, are there particular life events where it really makes sense to be talking to them about income protection?

JENNIFER GILCHRIST: Yes, the kind of typical triggers that you get for a protection conversation just now is much more about buying a house or family protection of some, if you have a child or some triggers like that. What we did find in some research that we did recently was consumers thinking there are other triggers. And this plays for me right into income protection, because what the triggers they were telling us were quite important to them was if they were moving job, if they had a salary increase, or actually they were moving to be self-employed or starting up their own business. So we were seeing these triggers as being actually quite important times in life that actually advisers could use as different ways of opening up conversations with new clients. Or actually doing a review on an existing client’s protection policies to make sure that the policies were keeping track with their needs, and if their circumstances had actually changed that they could actually review them and advise on what best to do now.

PRESENTER: So in a sense if you’ve been doing a job and you’ve got all your insurance tagged to the fact that you earn say £30,000 a year and you get a massive pay rise and suddenly you earn £45,000 a year, you need to go back and up your…

JENNIFER GILCHRIST: Revalue.

PRESENTER: Yes, up your protection up.

JENNIFER GILCHRIST: Yes, because effectively what you really want to do is make sure that if it is income protection and you’re off work that you’re used to your higher salary. And the last thing you want to be doing is getting financial protection that doesn’t cover the bills you now have. Because you’ve got more disposable income, you might decide you’ve got a higher cost of living, and therefore you want that to be covered, and for you when you are ill not to be having to worry about your finances.

PRESENTER: And does this throw up any particular issues if you’re self-employed, where often salary is perhaps a little less even, maybe you’re taking a lot of money, more money from dividends out of the business than from a straight salary, what particular issues does that throw up for advisers, or where advisers can add value?

ROBERT HARVEY: Yes, it’s an interesting point actually. Because when we commissioned our research last year, one of the things we actually found is that a large number of self-employed individuals didn’t even realise that this product was designed for them to a certain extent, or that they would be eligible for it. So I think there’s challenges with the way that income protection policies are designed, because they aren’t necessarily always as flexible. It doesn’t always cater quite to the needs of a self-employed person, where there can be fluctuations in terms of earnings and as you point out for those that may run their own business the way that they remunerate themselves through salary and dividends, there can be complications around that.

But I think that certainly I think there’s a need for advisers to stress to self-employed people that these products are out there. That actually there is a massive need for this protection if you are self-employed, because you will have absolutely no sick pay to fall back on, you will have no protection that an employed person may to a certain extent have. I think the product providers need to look at the design of these contracts, not just in terms of the way that they cater for the self-employed, but I think just in general. People’s lifestyles are changing. Increasingly we’re finding people are going through numerous different careers through their working life. They’re constantly changing jobs, changing careers. They may one minute be working in one job and then transition to a completely different profession. And sometimes income protection policies can be seen to be a little bit restrictive. And I think there’s a broad recognition though within the industry that there is a need perhaps to adapt and recognise that lifestyle habits and working habits are changing, and ways in which products can be adapted and changed to reflect those changing patterns of work and employment.

PRESENTER: Jennifer, your final thought.

JENNIFER GILCHRIST: I think just responding there to what Rob was saying about the products not being as flexible and adaptable, I completely agree with that. But I think providers are in the midst of looking at it and trying to make it much more focused against this changing employment world that we’re seeing where a job isn’t for life anymore. And I think we will see changes there where policies will become much more flexible about being switched on and off with your job and the benefits that your new employer or your existing employer is providing you with, so I think we will start moving with the times and you’ll see changes coming along with products.

PRESENTER: We have to leave it there. Jennifer Gilchrist, Rob Harvey, thank you both very much.

JENNIFER GILCHRIST: Thank you.

ROBERT HARVEY: Thank you.

PRESENTER: In order to consider the viewing of this video as structured learning, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. By the end of this session you’ll be able to understand and to describe advisers and consumers’ views on the protection market and income protection; the role advisers play in income protection; how to dispel the myth that protection and income protection are complex and a difficult advice sale; where income protection fits within a client’s advice journey; and talking points for your client about the need for income protection. Please complete the reflective statement to validate your CPD.

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