Coming up short?

With traditional income protection failing to grasp the imagination of today’s consumer, Harvey Jones asks whether short-term products will save the day

How do you solve a problem like income protection (IP)? Insurers and intermediaries have been singing its praises from the hills for years, but have not been able to persuade the public that this is one of the most important types of insurance they could buy.

One of the dilemmas facing IP is that its greatest strength is also its greatest weakness: the promise to pay successful claimants a regular monthly income until they either recover or reach retirement.

It is a fabulous pledge, because it binds an insurance company to paying a regular monthly income for as long as 30 or 40 years – but that generosity also makes it expensive. This drastically reduces IP’s appeal, particularly among manual workers in occupational classes 3 and 4, who present a higher risk and find premiums beyond their relatively limited means.

One solution is to dispense with this long-term promise and offer more short-term IP policies with limited term payouts. Could this give this notoriously undersold form of insurance a mighty boost? Or could it sink IP altogether by glibly ditching its finest selling point?

Michael Webber, managing director at brokers The Health Insurance Shop, says traditional IP policies cost too much for all but the lowest risks.

“If you’re a 25-year old single male office worker who doesn’t smoke, the likes of Friends Provident or Liverpool Victoria will charge around £25 a month,” he says. “If you’re female, you could pay an extra £20. If you smoke, a further £25. If you’re a builder or electrician, that’s another £20. You could soon be paying £90 a month.”

Webber targets a low-cost, limited term plan at truck drivers, and has so far sold 6,000 policies. The plan is now attracting other industries.

“Truck drivers don’t worry about getting a serious long-term health problem that might stop them working until retirement age,” Webber continues. “They are bothered about coping with more immediate problems.”

The stripped-down IP plan covers only a limited range of conditions including broken bones.

“Truck drivers dread breaking an arm or leg and spending 10 weeks in plaster,” he says. “This gives them the cover they want for an affordable premium.”

Successful claimants receive an initial lump sum – £1,400 for a broken arm, £2,500 for a broken upper leg. It also offers a £20,000 death or loss of limb benefit – plus £200 a week for up to two years, payable after just 14 days.

Workers in class 3 or 4 occupations, such as builders or truckdrivers, pay a flat £33.17 a month, while workers in lower-risk class 1 or 2 occupations pay just £16.13 a month.

“The plan won’t pay out until you retire, but it’s an affordable and popular alternative to full-blown IP,” Webber says.

Several traditional insurers include the option of two, three or five year benefit terms on their standard personal IP plans. Linton Penman, head of retail marketing at UnumProvident, says its appeal has proved limited for two reasons.

“First, a lot of IFAs simply don’t realise this option is available. Second, when IFAs do present it as an option, most customers still opt for the superior cover of a payout until retirement age,” he says.

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