Actuarial Post: Income protection – the forgotten product
This article was originally commissioned for the August/September 2015 edition of the Actuarial Post.
More people have pet insurance than have income protection and critical illness combined. This sounds hard to believe but the numbers don’t lie. The fact that these products only cover 7% of the workforce in 2015 speaks volumes for the failure of the industry to engage with the public and employers on the subject. Comparing this to the 25% of the population that has pet insurance and the problem is clear.
This is a shocking statistic, and shows the need for much more effort on the part of providers and the government to bring home to people the value of income protection.
The chance of contracting a disease that will prevent one from working is relatively small, which means that the risk is low. Accordingly, these products are priced very low, and represent good value. In particular today, when most people in work are carrying a lot of debt, the penalty of losing one’s income is very severe. For many households, the illness of the individual is tragic but will be compounded very quickly by the arrival of ominous letters from creditors demanding payment. The stress of this is likely to inhibit recovery, and therefore, postpone the day of reckoning.
And, according to the same survey, 55% of people say they have just 3 months’ salary in savings whilst 29% have just one month. Clearly, even a short disability of a few months will be sufficient to run many household budgets into the buffers.
Income protection is a cheap and practical policy whose benefits are easily explained. This should be an easy sell, as people in debt readily understand the fear of losing their salary via redundancy and what would happen to them. The trouble is they never consider the likelihood of getting an illness or injury that will do the same, yet every year 300,000 people in the UK have to give up work due to illness. The loss of a salary has a devastating effect on their finances. Even those who resume work can be many years getting back to where they were financially before it happened.
This is why income protection is such a valuable product. It is relatively cheap for the level of protection it affords and, whilst none of us wish to get sick, if we do then the knowledge that we will still be getting a substantial proportion of our salary takes a good deal off the pressure of being ill, and will likely contribute to a quicker recovery where that is possible.
So, if the product is such a good bargain, why are so few people interested in taking it up? Is it lack of knowledge of the benefits? Or, is it the lack of knowledge of just how severe things can be if you are one of the unlucky few to get struck with a debilitating disease?
There is no doubt that much of the population could be protected quite cheaply but there seems to be a lack of will from employers and / or the government to highlight this solution to a severe problem. If there was a co-ordinated approach, then a much higher take-up of this could be achieved, and a lot of the misery that afflicts those who become unable to work would be alleviated.
The problem is that there is no appetite to push for the protection when most will not ultimately claim against it. But that is the same argument as saying that fire insurance is completely wasted if your house doesn’t burn down. The consequences of a debilitating illness are so severe that it is well worth being protected against it.
Possibly the best solution would be via employers. Whilst I’m not normally in favour of employers getting directly involved in the welfare side of their workforce, given that income protection is to protect from the loss of income supplied by the employer, there is a strong case for the employer to participate in insuring the workforce against the loss of that income through inability to earn. It shows a concern for employees, and means that employers won’t be faced with unfit employees attempting to return too soon purely for financial reasons.
As auto-enrolment is succeeding with pensions, there is a case to make employers spend some of their money on providing income protection to their employees. It is a relatively cheap employee benefit that is tremendously valuable if it hits, and will also reduce the burden on the state. As such it may well be possible to cross-subsidise the employer with NI reductions to correspond to the amounts being paid for the policies.
An alternative would be a major campaign driven by the government to get people to insure themselves against long-term debilitating illness, but a more forceful approach would yield more benefits. Given that auto-enrolment is under-way, another campaign to individual workers would probably be confusing. It would be far better to put the onus on employers to provide income protection as a cheap, yet valuable, employee benefit. Employers are an easier group to reach, and the overall benefit in terms of improved employee return rates and reduced employer NI contributions should prove attractive to them. It’s a cost-effective way to improve morale, make the staff feel cared for, and improve productivity. Employers just need to be nudged into doing it.
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February 7th 2015, Protection Insurance Survey, Drewberry™
December 1st 2014, No Place Like Home, Leonard Cheshire Disability