Income protection (IP) sales have soared due to a number of factors including customers’ increased appetite for normal retirement age products and the product potentially making gains at the expense of other types of cover.
Significant changes in product premiums are also potentially having an effect on how the protection market is developing, according to Joanna Scott, technical manager and industry affairs manager, life and health UK and Ireland at Swiss Re
Scott was author of the reinsurer’s Term & Health Watch 2024, which showed while life and critical illness sales were relatively stagnant, IP sales were booming last year.
She also spoke to Health & Protection about why the important role of advisers and the industry in promoting IP as well as government welfare reforms set the conditions for these sales to continue their upward trajectory this year.
But the most notable trend from the report was the continued growth in new IP sales.
“We’ve definitely seen a rise in income protection that’s accelerated in recent years,” Scott told Health & Protection, adding that in the last year this has largely been driven by an increase in products sold with a benefit paid to retirement age.
“The normal retirement age products increased by over 36% which is pretty hefty when you compare that with a 1.3% rise in those with a two year limited payment term (LPT),” Scott explained.
Rebalancing of IP market
While in recent years affordability concerns have led customers to consider shorter term IP cover, the market appears to have rebalanced.
“The split of NRA and LPT are at 51% to 49% whereas even looking back to 2022, just 43% of sales were sold to normal retirement age,” Scott continued.
“There’s definitely been a shift. The increase in normal retirement age has coincided with a drop in the average premium over the last few years which is why more people are possibly looking to income protection if you’re wanting to protect your income for a longer time.
“So people might be looking to cover themselves to retirement age if you can afford it for that longer period of time because the average premium for a two year LPT product has actually increased slightly.
“So if you’re deciding between the two and you can afford the full benefit, it might suit your needs better, if you’re looking at your whole protection proposition to have that longer term IP.
“Definitely, IP serves a purpose for some, but what happens at the end of the one, two, five year benefit period if you’re still off work?
“But we have heard anecdotally that some of those limited term products are sold as part of a multi benefit policy.
“That will depend on an individual’s circumstances and what fits their products.”
Life declining for standalone CI and IP
Turning to the slight drop in term cover sold with critical illness (CI), Scott suggested this could be linked with increased demand for IP and standalone CI.
“Just looking at the wider protection proposition, it’s people potentially taking out more cover, but different types,” Scott continued.
“So we’ve definitely seen a trend of having more of a smaller amount of standalone cover while potentially having income protection instead of having that one accelerated product.
“Especially when you look at the decreasing term assurance (DTA) numbers that we’ve used as proxy of covering a mortgage, we’ve seen a rise there but a decrease in the DTA with CI.
“When we look at the average premiums, the DTA with CI is more than double the decreasing term-only premium.”
As a result, Scott added affordability could also be a factor.
“Where if you’re looking at more than double the premium, would you possibly look at an income protection policy or would you look at standalone critical illness?” she added.
“It’s not to say one’s taking away from the other, but it definitely feels like people are looking more broadly at the different types of protection out there rather than just looking at an accelerated term with CI product.”
More sales through advisers
Asked whether IP’s success could be down to the role of advisers, Scott added that income protection sales are predominantly generated through adviser channels.
“We’re one step away from the distribution conversation,” Scott continued.
“But we definitely see, especially for income protection, the majority of those products are sold through an advised route.
“I think 94% of all income protection policies are sold through an advised route, so you could see the growth there is predominantly driven by the adviser’s conversations, but it is a bit more mixed on the term and the CI numbers where we see higher levels of either non-advised and direct aggregator channels.
“We can’t say for certain what’s happening in those conversations, but definitely income protection is predominantly an advised product.”
IP growth
In terms of whether IP sales will continue their upward trajectory, Scott maintained there had been an increased focus from the sector in promoting this benefit.
“The industry has done a great job in the last few years with groups like the Income Protection Task Force (IPTF) drumming up support and awareness for products like income protection,” Scott continued.
But IP’s fortunes could also be tied to government’s reforms to the welfare state on the horizon and an increased focus from the Financial Inclusion Committee.
“They have identified income protection as a potential solution for getting access to insurance for people and potentially looking at innovation of products,” Scott said.
“So if the government is increasingly looking at income protection as a potential solution, we definitely would expect income protection to continue to grow especially with the additional support an IP policy can provide alongside it.
“We definitely feel it can complement the welfare state rather than take away from it and obviously keeping people healthy and at work is a joint priority across the public and private areas.”