Is the Income Protection Insurance Market Broken?
May 27, 2014
I have read an increasing number of articles recently regarding the financial services’ concern over consumers’ apparent lack of awareness when it comes to protection products and the urgent need for reform.
According to Aviva’s latest report ‘Rethinking Protection’ three quarters of families are nervous about their lack of financial protection in the event of a bereavement or illness yet still do nothing about it. The report goes on to say that six in ten have no life insurance whatsoever and only 8% of families have any form of income protection insurance.
So is the cynic in you saying that these reports are manipulated and sensationalised; created to drive fear into the hearts of unprotected families who go flocking to the arms of insurers, pleading for the best protection on the market? I guess I can’t blame you; like bankers and estate agents, insurers do have a bad reputation but in this case Aviva does have a point!
Yes we are all trying to balance tight budgets and at times like this something has to give but should that really be life insurance, income protection or critical illness cover? Are these really deemed as luxury items or as Aviva suggests, should these insurance products form the basis of our financial planning needs? Can we afford not to have it?
What would happen if you were made redundant; unable to work through sickness or an accident that renders you out of action for some time? Even worse what would happen if you or your partner died? Not nice thinking about I know but shouldn’t we all have plans in place just in case? Wouldn’t protection be a better idea than buying those weekly lottery tickets, takeaways or coffees at the local Costa or Starbucks?
There are various types of income protection insurance plans on the market which aim to cover, or in some way supplement your income should you be unable to work for a period as a result of sickness, accident or unemployment.
Most commonly taken out alongside a mortgage, income protection is usually the first plan to be refused by applicants as it adds a further £20 plus a month to an already large outgoing. What with buildings insurance which is mandatory, contents insurance, council tax, energy bills on top of all the other daily household bills, budgets are tight. But surely it’s a catch 22. If you don’t have income protection and find yourself in a position when you are unable to work, how will you be able to pay all these bills anyway?
Sometimes referred to as ASU or accident, sickness and unemployment insurance, income protection insurance can be expensive but you can of course reduce your costs by shopping around for a plan, rather than automatically opting for the one offered by your mortgage provider.
And if you are looking to reduce costs further, you could choose to only take one or two elements of the plan, for example, redundancy insurance or accident and sickness insurance. It all depends on your circumstances and of course your budget.
For their part insurers are looking to clean up their act and move away from the perceived reputation of never ‘paying out’ by publishing claims data and making the claims process simple and speedier but Aviva wants to go further than this. They are calling on the government to work with insurers to better educate children at school in preparation for their future and adults, providing information at key life events such as having a child, moving home, marriage and divorce.
Aviva also want employers to play a significant role in getting the nation protected by offering workplace income protection schemes with an auto-enrolment facility; very much like the new workplace pensions scheme.
So I guess the answer to the question ‘is the income protection market broken’ is no; it just wasn’t built properly in the first place , but with the help of insurers, employers and the government getting their heads together, hopefully the UK will see the true value of protecting their family in the very near future.