Protection is not high on clients’ list of priorities but it should be. The industry needs to work to raise awareness of the many benefits.
It can be all too easy to take a steady income for granted.
But what happens when it disappears ─ for instance, if your health takes a knock or you lose your job?
The impact on your finances could potentially be disastrous, not just for you but also for your family.
Despite the importance of protecting family and home against unwanted changes in financial circumstances, it seems many people may have not put contingency plans in place.
Pensions, investment and insurance specialist Drewberry found in its 2017 Wealth and Protection Survey that only a tiny proportion of people (6.2 per cent) have an income protection policy.
It also reveals that if they were unable to work, one in four of the UK population would still have a mortgage of more than £100,000 to pay.
Protect and survive
This raises a fundamental question, as Jennifer Gilchrist, protection proposition lead at Royal London says: “We’ve all got a stack of bills to pay each month, so if you don’t have any income, what are you going to do?”
It also raises the question of why so few people are buying protection policies.
One of the reasons is lack of awareness, according to Paul Reed, a director at Vita.
As he observes: “People just don’t have any concept of what income protection is. Banks tend not to sell it anymore, so unless their adviser tells them about it, they don’t know about it.
“Yet, everyone who is working, unless they don’t need the money, is dependent on their income, so it should be the first thing they protect.”
He adds: “People are quite happy to insure their cars, pets, laptops and homes, but are not protecting the income that pays for these insurances in the first place.”
“People expect protection to be expensive, but they are then often pleasantly surprised by the cost”
– Jennifer Gilchrist, Royal London
This echoes the findings of Drewberry’s survey which discovered that people are four times more likely to have pet insurance than income protection.
There is also evidence to suggest that people have concerns about costs and claims.
Mike Farrell, protection sales director at LV= explains: “Our research found that the main reasons people don’t have income protection are that they think it would be too expensive and they don’t believe it would pay out if they needed to claim.”
However, these perceptions may not be justified, as Ms Gilchrist points out: “The reality is that thousands of people benefit from claims paid by the industry each year.
“Millions of pounds are paid out, providing people with support through difficult times.”
And it is perhaps more affordable than people might anticipate.
She notes: “People expect protection to be expensive, but they are then often pleasantly surprised by the cost. Also, they may not be aware that it can be tailored to budgets.”
Mark Cracknell, head of protection distribution at Aviva, agrees: “I wish everyone with a young family would see an IFA and see that the cost of income protection is actually very little.”
However, cost and concern about payouts are not the only issues.
It seems there could be other reasons why people are not buying protection policies for their families, according to Ms Gilchrist.
“There is a lack of awareness about protection and the industry needs to ensure that consumers know more about the benefits,” she says.
Mr Cracknell agrees that people could be more aware of the need for protection insurance.
He comments: “People buy insurance for their cars and houses because they have to. As an industry, we need to get across the importance of buying income protection in the same way.”
Life insurance is well known as a means of protecting your family if the worst happens, but is it a higher priority than protection against ill health?
Emma Thomson, head of customer care at LifeSearch, considers the potential choices.
“Income protection is arguably most important to buy”, she says, “as ill health or injury are more likely to happen than early death.”
She adds: “Critical illness cover is another very useful product for families, as it will pay out on diagnosis of a specified list of conditions.
“Plans vary significantly, so speaking to a specialist protection adviser is recommended.”
Mr Reed believes that a mix of policies could potentially be the most suitable option.
“As life expectancy increases and baby boomers continue to work rather than retire, there is still the need for protection”
– Mark Cracknell, Aviva
“It’s a given that life insurance is needed, so the ideal would be to have a blend of income protection and critical illness cover. They shouldn’t be mutually exclusive,” he emphasises.
“If budget allows, they should go hand in hand. The lump sum that comes with critical illness cover can pay for private treatment, for example, or adjustments to your home.”
It is also important to tailor life insurance and protection decisions to individual needs, says Mr Farrell.
“Protection products are designed to suit different people in different situations.
“If someone is choosing between protection products, they should speak to a financial adviser who will take a look at their priorities, what they want to protect and ensure they are getting the right protection,” he explains.
“For example, income protection may be more of a priority for a single person than life insurance.”
Above and beyond
Individual protection needs also extend way beyond those of people with young families.
Advisers might also find that it is becoming more of a requirement for older generations.
As Mr Cracknell points out: “As life expectancy increases and baby boomers continue to work rather than retire, there is still the need for protection, because as they get older there is the increasing likelihood that they won’t be able to work through ill health.”
Ms Thomson adds: “Baby boomers often have protection needs that go beyond the need to just pay for a funeral.
“Many still have family responsibilities, such as caring for grandchildren or for elderly parents.”