Andrew Wibberley, Co-chair, Income Protection Task Force (IPTF)
In the last of our articles digging into Iress’s data to better understand the Income Protection market we’re looking at some of the differences between short term IP (for 1,2 or 5 yrs) and IP to retirement.
There is no doubt that much of the growth in the IP market has been fuelled by a growth in products that restrict the IP payment. Last year slightly more short term products were bought than to retirement products, a seismic change from a decade ago when over 90% of new IP policies were to retirement. This is a factor in explaining why the growth in IP premium being written sometimes lags behind the increase in numbers of policies being sold.
These products have the benefits to the insurer of less risk of a long claim and consequently mean lower prices can be obtained. They still have value added services included and cover the period that most people will return to work within.
A memorable phrase from Income Protection Action Week was Matt Chapman’s suggestion when necessary to “ski downhill” from the best solution for the client rather than try and clamber up the mountain. Nevertheless, there are clients where the best option is a shorter term product to provide reassurance, access to services and financial guarantees for a period of time. Indeed, the IPTF’s own 7 Families campaign showed just how much of a difference with a year’s worth replacement income and services to support an individual.
The Iress data shows that in general people applying for short term IP apply for a lower benefit amount – the average monthly benefit for IP to retirement is 29% higher than for short term products at £2,411 to £1866.
Another angle to this is the insight that for full term insurance 39% of people proceed with the maximum cover they can obtain rather than applying for a lower fixed amount, compared to 31% of people applying for the maximum cover for a short term contract.
It also suggests that people applying for short term IP are in worse health than those taking out cover to retirement. 9% of people applying for long term policies declare themselves as smokers compared to 19% of people applying for short term policies. Similarly 20% of people applying for long term policies were clinically obese (with a BMI of 30 or over) as opposed to 29% of people applying for short term policies.
This highlights some of the challenges in ensuring that you find the best insurer for a specific individual. Many insurers do not differentiate underwriting approaches between short and to retirement IP policies, but some already do and with the increased market and extent of health issues in this portfolio it is expected that insurers will focus on this area more in coming years. Advisers should be aware of these differences when considering IP cases where a rating may be applied.
Ian Sawyer, Commercial Director at Howden Life and Health commented: “To retirement is undoubtedly the best advice but the premium remains out of reach for many. As well as the rise in STIP, age costed schemes have also helped make this product accessible to many more people, and consumers get the concept that it goes up with age, as many other products do such as PMI and travel insurance.
“Immediate needs unfortunately tend to trump the long term view. Underwriting remains a problem, as logically a STIP should attract a different underwriting strategy to long term and I’d love to see some more differentiation in terms and the reduction in permanency of exclusions for STIP – this will help increase lives on risk.”
For all advisers and insurers understanding the different factors that cause someone to favour these different features is vital in meeting Consumer Duty requirements and providing products and services that meet the needs of all.
