No one likes taking out insurance. And most of all no one likes taking out income protection insurance. For most people it is a long way down the list of what’s important to spend limited financial resources on. Financial products are unpopular discretionary purchases and when money is available the mortgage, the ISA or the pension are often thought of first.
When finally a person has to address taking out some serious insurance cover it is often because they have just taken out a mortgage and feel that they would not want to leave their partner with sole responsibility for a huge debt should the worst happen.
It is often in this context that many consumers first become aware of the existence of income protection insurance as they will undoubtedly have been offered a policy to protect their mortgage repayments by either the lender or a mortgage intermediary. Another way they may have some familiarity with income protection insurance is via banks, credit card companies or retailers who have persuaded them to protect their ability to make their monthly repayments.
Could the buying public have had a worst introduction to income protection insurance than these two situations?
Scandal
Much has been written and said about what is increasingly perceived to be the latest financial mis-selling scandal and this has been largely driven by what we in the industry know as Payment Protection Insurance. But of course the public are not professional insurance advisers and when considering a purchase will not draw the distinction between PPI and Income Protection Insurance. They simply see yet another product area where we the providers and intermediaries are not to be trusted.
So, whilst persuading consumers to take out Income Protection was always an uphill struggle because of its lowly position in the “needs and wants”, it now has become a challenge of Everest proportions – still mountains are there to be climbed!
So what must we have with us at base camp? I would suggest the three critical elements are:
· Cover which actually matches the customer’s real needs;
· Cover which will deliver the promised benefit when it is claimed;
· Cover which represents value for money,
Looking at the first of these we are immediately confronted with one of the fundamental problems of PPI whether it is related to mortgage repayments or other types of loan. Historically a typical product has offered protection for a limited period only – typically 12 or 18 months. What help is this to a customer who is unable to meet their repayments because they have been unable to earn through sickness or accident for a much longer period? A further mismatch is that the amount of cover may have been set at the outset and does not cope well with increased or decreased repayments or is not readjusted in the event of a new mortgage being taken out.
Commitment
Providers and intermediaries must in the future show a commitment to advising a customer properly, fully taking into account the nature of the risk being covered and only offering solutions which genuinely can protect at the level required for the period needed. This will bring an end to the tick “the box approach” to sales and the feeling customers have had in the past that if they don’t tick the box they may be at a disadvantage in getting the mortgage or loan approved.
The second contentious aspect of recent history, and the issue which has driven the most emotional form of dissatisfaction and adverse publicity, is of course rejection of claims by insurers. The root cause of the problem is, of course, underwriting at point of claim rather than underwriting at point of purchase. Yes, to underwrite at point of purchase lengthens the advice process and works against the conversion ratio achieved by the “tick box/ bundled sales” technique. But I am sure you do not need me to remind you of how short sighted this philosophy has been – just look at the list of FSA fines and the reaction of the Office of Fair Trading.
Today great advances have been made in underwriting processes and it no longer needs several pages of medical questions and then supporting doctor’s reports etc. Those wishing to explore how the process can be speeded up and at the same time improved from a technical underwriting perspective should consider tele-medical underwriting processes provided by outsourced companies who specialise in this. Consumers, intermediaries and product providers can all win from adopting this approach.
Thirdly, and of huge importance as personal cash flows tighten is offering value for money. Paying high premiums for relatively small amounts of cover lasting for short periods is stupid from everyone’s point of view. If the cost of typical PPI cover is compared to other forms of Income Protection it has been over –priced. There have also been serious price discrepancies within PPI products - historically just compare the best whole of market prices for Mortgage Payment Protection with what has been charged by lenders who have bundled the sale within the mortgage package. You can find that the first approach halves the monthly premium!
Solutions
So who is sitting in base camp ready to climb the mountain and deliver these solutions? I think the first place to look is at the mutual insurance sector where you are more likely to find keener pricing and an ethical approach to customer needs. Secondly if the mutual concerned is a Friendly Society these pricing and ethical considerations will be at their keenest.
By now you will no doubt be thinking as the Chief Executive of a Friendly Society he would say that wouldn’t he. Well, many IFA firms are already very familiar with the income protection products offered by Friendly Societies and of course the premiums and benefit levels are available and open to comparison.
Let me explain by giving you two examples of what the products can do.
Firstly, I make no apologies for not giving you a sector average regarding Mortgage Payment protection because we have developed a unique offering. Our Mortgage Payment Protection policy relates to the special terms period of the mortgage loan. Therefore if the customer has taken out a 5 year fixed rate mortgage, the benefit will be paid not for say 12 months but for the special terms period. In this example if illness occurred 12 months after the mortgage commenced and the customer could not return to work then the mortgage payment would be met for the next 4 years. When the special terms period ends and a new mortgage payment amount and term is agreed the insurance policy can be recommenced to reflect this change. The cost for each £100 of benefit for someone aged 18 to 30 would be £2.52p so an £800 per month mortgage payment could be protected for £20.16 with a much better benefit period.
Income
It is our view though that all customers would be better off in every way if they took out Income Protection Insurance rather than assembling a costly collection of different PPI policies. So another example is as follows and this does take into account the Friendly Societies in general.
The income protection plans offered by Friendly Societies are also known as Age related plans; these offer a low cost way to protect up to 60 per cent of gross income. Let’s say a customer earns £2,000 per month gross and wants income protection of 60 per cent, i.e. £1,600 per month. For someone aged 18 to 30 with a 4 week deferred period this would be in the region of £50 per month. The benefit level of £1,600 may reduce after the first year or so but the payment would continue until they are able to return to work or they reach their retirement age if they are unable to work again. Full Permanent Health Insurance can easily cost twice as much or a collection of PPI policy policies covering a variety of loans or credit arrangements.
But there’s more good news. Many Friendly Societies who offer these products do so without different premiums for male/female or for smoker/non smoker or for different occupation classes. What a difference this can make to any intermediary explaining the product to the consumer.
Come and join us at base camp the ascent has begun!
