Consumers do not understand the benefits of protection and it is up to advisers to use the tools from providers to raise awareness
Back in 2004 when FSA assumed the regulation of mortgages the new regulator recognised the desirability of advisors considering protection products for borrowers.
This was manifested by the requirement of a note on the mortgage file that payment protection (yes PPI) had been discussed and either accepted or refused by the applicant.
So despite subsequent events PPI was not always miss-sold and was advised on at the insistence of the regulator. It was and is reasonable to protect the new borrower against loss of income through illness or accident.
One of the many problems with PPI was that cover did not extend beyond the mortgage and related insurances payments.
When left with no income other than the PPI benefit borrowers were naturally tempted to consider other commitments e.g. food before their commitment to the lender, resulting in arrears despite the cover.
The PPI scandal and the effective marketing efforts of the claims companies have unfortunately caused advisers to avoid the protection question. Also thousands of current borrowers have cancelled their cover and are now vulnerable if illness or accident lays low the breadwinner.
The FSA’s Mortgage Market Review sensibly requires mortgage applicants to receive professional advice and further places the responsibility for the assessment of affordability with the lender.
This assessment must drill deeper than a current calculation of disposable income or systems based credit score against possible future increasing rates. Under the heading of affordability some provision for the unforeseen loss of income must at least be recommended if not made compulsory. Particularly but not exclusively for the self employed.
Products like Income Protection are designed to replace a percentage of the applicant’s income during times of incapacity through accident or illness.
This gives far more comprehensive protection from mortgage arrears since, if the affordability process has been correctly reviewed, all but the over committed borrower will be protected.
But beyond this, protecting your client’s income simply makes good sense. The threat of a call from the regulator or FOS enquiring as to why your client’s mortgage payments were not protected as part of your professional advice service would not be welcome by most advisers.
On top of this any commission paid to you and your business for mortgages, loans and other financial products would undoubtedly be at risk of commission claw back if your clients are unable to meet their payments, leaving a hole in your business balance sheet. But more importantly for the day to day running of your business, protection contracts can provide a reasonable and steady source of cash flow, particularly now many advisers are operating under a fee based business model.
In a recent adviser survey undertaken by Cirencester friendly, 85 per cent of advisers rated income protection as a must have product for their clients compared to 73 per cent for critical illness, yet almost five times as many CI contracts were sold in 2011. Almost half of the advisers surveyed cited a lack of understanding and awareness of income protection amongst consumers as a major barrier to getting buy-in for the product.
Although at its most basic level income protection is a simple product, a premium is paid in exchange for an agreed ‘income’ should the contract holder be unable to work and earn a living as the result of illness or injury, providers, in attempts to distinguish their products and gain market share, have inadvertently added a layer of complexity which can make products difficult to compare on a like for like basis.
Added ‘benefits’ such as health and well being services, help-lines and discounted gym membership are all nice to have but they distort the product and can inflate the premiums often leading to vast differences in price. 55 per cent of advisers believe that cost is one of the biggest barriers to consumers when it comes to IP, if cost is an issue there are several options open to advisers to ensure clients remain protected.
It is important to sit down with your client and choose a contract that can be tailored to the individual with a longer deferred period for sickness or reducing the benefit amount so that it covers the essentials. If you have a client who smokes, works in a manual occupation or is involved in hazardous pursuits, which some providers add premium loadings for, choose providers like Cirencester Friendly who don’t.
With products such as income protection the key feature that tests the true value of the product is simple – does it pay when a claim is made? On the whole IP providers have, in recent years, led the way in publishing claims statistics and although the level of detail can vary an adviser armed with this information has a much better chance of overcoming another barrier to the purchase IP – the belief that insurers don’t pay out.
Almost a third of advisers believe that a lack of awareness is another problem in engaging clients. In recent years there have been national television campaigns initiated by larger providers which were received with mixed reactions and many providers supply advisers with literature, letters and tools to help raise awareness and explain the product.
A little bit of proactive action can go a long way to increasing your earnings potential from IP. Look at your existing client database, are they employed or self employed? Do they have any employee benefits? Do they have a partner who is also working? If they own a business would they let you talk to their employees? Have they cancelled a PPI contract?
Use the tools available from providers to help you raise awareness among your existing clients and to attract new business. Most providers will have an intermediary sales team who is there to provide support to advisers and help them develop their IP business all you need to do is pick up the phone.
Spending that extra half an hour with a client to ensure that their finances are safe no matter what happens, can make a huge difference later down the line and a client that is properly protected when the worst happens, is one that will continue to send you business for life.