Combining income protection and critical illness cover gives clients fresh options
There is ongoing debate over which type of illness product should be given the most prominent position in an advised protection conversation. Some sit firmly in the income protection camp, of the opinion that customers should always be advised to take this above everything else. Others, in camp critical illness cover, prefer the options that a lump sum provides, particularly alongside a mortgage, as well as the additional protection for children. But is it possible – and, in fact, more important – to sit somewhere between the two, in a middle ground where we advise customers that in an ideal world, they would have a little bit of both?
It always depends on an individual’s circumstances, but when you think about the benefits specific to each product type, I think it is easy to see how a mix could make for the best advice.
It is right that IP is discussed as being an essential. This policy type generally pays out after a chosen deferred period if you are signed off work and deemed unable to do your own job. It is relatable, as consumers should be able to understand the significant financial impact that losing a regular income would have on their ability to pay bills. It also has the benefit of covering illnesses that are not listed under most CIC policies, such as musculoskeletal and mental health conditions.
Recent provider development around IP has also seen extra benefits added to policies, for example, treatments that can often be difficult to access quickly via the NHS, such as early-intervention rehabilitation cover that will help get you fit, well and back to work.
Royal London and LV= have included fracture cover at no extra cost, which could really help a policyholder with a serious break, and who is unable to work but still within their deferred period.
The big benefit of CIC is that it pays out a tax-free lump sum. This is not a windfall payment, but it provides the policy owner with options. The money can be used to pay bills, to pay for private treatment, or perhaps to make changes to the home following a disabling injury. The point is that it gives you a choice that many would not have without a lump sum. In addition, there is the benefit that the majority of CIC policies include children’s cover.
While this would not be the reason most people take out a policy, statistics show it is a significant claim area and is likely to grow with the addition of more child-specific conditions. According to Legal & General’s figures, £1.9m was paid out in 2018 across 115 children’s claims. These payments will have made a huge financial difference to families at an incredibly traumatic time.
As there are clear benefits to both products, is it practical and affordable to have a little bit of both?
Since there has been more investment in product and platform development, there are now more ways to take a mix of products. It is possible to make multiple products more affordable, attractive and easier to apply for. With IP, you can look at short-term cover, rather than protecting customers to retirement, ensuring a benefit is received for one, two or five years.
Age-related premiums can free some money in a customer’s budget in the short term, while outgoings are high in order to incorporate a small amount of CIC too. You can also look at covering essential bills, rather than looking at the maximum amount a customer can have.
Similarly, any amount of CIC would make a difference and it does not have to cover the full mortgage balance, for example. Ensuring there is a lump sum of money in the bank will provide breathing space.
Many providers, such as Aviva, Royal London, L&G and Zurich, offer a choice of a core CIC contract, as opposed to a more expensive enhanced version, that is slightly cheaper but still covers the main claim areas, such as cancer, heart attacks and strokes.
There is also a wider benefit to mixing products, and perhaps providers, that goes beyond the financial aspect. Given that different providers and products offer different additional benefits, a customer can end up with access to a wider range. For example, the mutual benefits package offered with British Friendly IP and then access to Best Doctors with AIG CIC, or the bespoke care packages that come with the Guardian or Scottish Widows nurse services.
It can, of course, be difficult to engage customers in an in-depth protection conversation, and there is a risk of option paralysis if we overcomplicate the situation.
This does not mean that advisers should shy away from it, as we owe it to our customers to get them as well-protected as we can, but this is where providers can help with further product innovation.
What we need is a product that combines benefits and therefore removes the need for a more complex mix. What we need is not two products that provide a little bit of both but one that does all of the above. Is that wishful thinking?
Lucy Brown is head of protection at London and Country