Is your client’s work-place income protection policy doing the job?
Why do your clients need income protection?
With the cost of living increasing, the requirement for long term financial security has become a priority for many more people, in particular those who are dependent on a guaranteed annual salary rather than having the safety net of other financial assets to fall back on. This, coupled with the fact that COVID highlighted to the younger generation that they are not superhuman, has focussed people’s attention on how they would cope if they found themselves unable to work.
At John Lamb Hill Oldridge we are renowned for placing high value life insurance policies to protect assets on death. However, we also know that our clients are much more likely to become ill and unable to work, rather than to die, before retirement and we therefore place just as much importance on protecting our clients’ quality of life during their lifetimes. Typically, a personal income protection policy will secure around 60% of previous earnings, with the proceeds being paid tax-free.
What about an employer’s own income protection scheme?
When discussing the subject of income protection with our clients of working age, a response we frequently hear is ‘I don’t need to worry because my employer provides me with income protection’. Although this might be the case, most clients are not fully aware of the policy details and often perceive the protection they have to be much greater than it is.
One of the key policy details that many individuals miss is that an income protection policy can be limited to a specific payment period (often between 2-5 years). This means that the payments received via a workplace scheme may only be payable for a set number of years before the policy lapses. This potentially leaves a long period of exposure between the end of a workplace income protection policy and a client’s retirement.
Even in cases where the client recovers from their illness, the working world will have continued to evolve during their absence. Leaving many individuals with reduced business connections and out of date industry knowledge, potentially combined with a reduction in their capacity to work, either mentally and/or physically compared to pre-illness. Statistics show that those returning to the workplace after just two years of long-term illness often experience an occupation change, worse employment status or even unemployment. Ultimately, this has a huge knock-on effect for their future prospects and financial security. Many clients will still be facing large financial commitments such as their mortgage, ongoing living costs and possibly even their children’s education. Longer term personal income protection, which provides much more comprehensive cover than their workplace scheme, should therefore be a priority for clients who would need to maintain a guaranteed income through to retirement if they found themselves unable to work.
What if your client is able to return to work?
Where clients are able to return to work, but only within a lower paid role or on a reduced hours basis, the monthly benefit on most income protection policies will reduce in line with how much the client is now able to earn – I.E. the policy payments will ensure that the individual does not receive less than the monthly benefit shown in their IP policy document but some of it is now being earnt rather than paid as an IP benefit.
Can a personal policy work in tandem with a work place scheme?
Yes. For those clients who already have income protection available through work, we would look to match as closely as possible the end of the deferral period on the personal scheme, with the end of the payment period on the workplace scheme, thus reducing the overlap and preventing unprotected periods. The deferral period is defined as the period between the point of being unable to work and the point at which the policy will begin to pay the monthly benefit. This is one of the biggest drivers in the cost of the insurance premium, ultimately the shorter the period between being unable to work and the monthly payments being paid, the more expensive the cover costs. This means for our clients looking to take out personal income protection with a deferred period to match their current workplace policy, the premiums are reduced massively compared to those applying for cover with a shorter deferral period.
What is indexation and why is it important?
With inflation currently running rampant, it’s more important than ever that advisers consider how they can protect the long-term value of their clients’ money over time. At John Lamb Hill Oldridge, we do this by always advising our clients to include the ‘indexation option’ on their plans. The indexation option means that the monthly benefit included in the policy will increase year on year and, although this means that client premiums will increase too, it is the safest and simplest way to ensure that the policy retains its value in real terms.
Some providers will even allow for the indexation option to be turned off and on again variously throughout the policy term. This can be hugely beneficial where a client needs to consider the affordability of benefit and premium increases from year to year. As long as the indexation option is active at the point of claim, the value of the indexation will be included in the monthly benefits paid which will then increase year on year throughout the period of claim.
A professional with a young family, who already had a workplace income protection policy, came to us seeking cover for longer than the 2-year payment period currently being provided by the workplace contract. Five years later they contacted us as they had unfortunately developed a critical illness which would likely prevent them from ever returning to work. The workplace scheme had kicked in, but more importantly, the personal income protection policy was ready and waiting in the wings to continue payments when the workplace scheme ended. Although there has been a decrease in their standard of living, the family is very relieved that they have been able to maintain their mortgage repayments and not had to downsize or remove their children from school which would have caused even more stress during a very difficult time.
Article by Jonathan Morris, Protection Specialist at John Lamb Hill Oldridge, published in Professional Adviser (15th November 2022).