Income protection - the ADL dilemma

A client with two broken arms may fail many of life’s basic tests but whether these include those set by his IP provider can mean the difference between a pay-out and poverty. Madeleine Davies investigates a much-maligned concept – activities of daily living

Described by one adviser as “flawed, intrinsically unsound and distinctly un-TCF”, activities of daily living (ADLs) attract a fair amount of opprobrium from intermediaries.

The inability to perform a specified number of listed activities as a criteria for a consumer to secure an income protection (IP) pay-out is, depending on who you speak to, grossly unfair or a simple means of ensuring affordability.

The continued existence of the activities approach is complicated by the fact that some friendly societies offer own occupation policies to all categories of applicant. Given that most providers admit that theADL model is less than ideal, some intermediaries are questioning why they persist in offering it to clients already cynical about their commitment to paying claims.

“Activity-based definitions are a particularly ineffective means of determining inability to work,” says Alan Lakey of Hemel Hempstead-based IFA firm Highclere, who has conducted his own research to prove his point (see table).

“The problem arises when you analyse the activities and realise the scope for non-payment to somebody who cannot work. The proof of this is blindness. “Most people struck down by blindness find it incredibly difficult to continue to follow their own occupation in the way they had done previously. If you look at the activity definitions you will find plenty of companies where blindness only fails one or two of the activities when two or three are required for a successful claim.”

Lakey says he places the vast majority of IP business with Cirencester Friendly and Pioneer, both of which offer own occupation policies to all applicants for the duration of their claim.

“It’s the only definition worth having,” says Pioneer’s brand marketing manager Nick Jones. Friendly societies have traditionally concentrated on blue collar workers and Jones speculates that insurers’ focus on occupation classes one and two means they lack the data to inform the creation of own occupation policies for higher risk applicants.

The niche argument is echoed by Cirencester friendly, a company which claims to have almost tripled its business in the last ten years.

“Because we only sell IP we’ve got to make an effort to be good at what we do,” says chief executive Paul Hudson, who suggests the contrast in offerings lies in the fact that some big providers do not see IP as core to their business. He argues that weaknesses in product design characterised by ADLs are likely to perpetuate poor sales, creating something of a vicious circle.

Source: Highclere Financial Services

AEGONScottishEquitable

Yes

No

No

AXA

Yes

No

No

Bupa

Yes

Yes

No

Bright Grey

No

Yes

No

Friends Provident

Yes

No

No

LV=

Yes

No

No

Nationwide

Yes

No

Yes

Norwich Union

Yes

No

Yes

Prudential

No

No

No

progress from Royal Liver

?

Yes

No

Scottish Provident

No

Yes

No

Zurich

?

Yes

yes

Roy McLoughlin of IFA firm Master Adviser agrees.

“When I’ve been offered ADLs a lot of people are really cynical about it,” he explains. “There are some real grey areas. The last person I tried said ‘I don’t want to do it’– they just didn’t believe it would ever pay out. Own occupation across the board has got to come in.”

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