With fewer than one in five people having income protection (IP) insurance it may seem peculiar to read about the risk of people having too much IP.
It is important to talk about this to ensure we do the right thing by those with IP, particularly with a Consumer Duty lens on and also with the desire to continue to grow a sustainable IP market.
How can overinsurance occur?
There are a number of ways overinsurance can occur:
- An income may have been declared on application that was never supportable for the policy. This risk is particularly high for self-employed or limited company directors who may reference a figure that is not considered as income by the insurer.
- Income increases may not have kept up with indexation increases over time. This risk has been particularly acute with the rate of inflation in the last 18 months meaning that for anyone who took out the maximum IP allowed two years ago they may now be at risk of not being able to claim the full amount under an indexed policy.
- An income may decrease around life events e.g. acting as a carer for another or while managing the early stages of illness.
What happens when overinsurance occurs?
If a claim is made where the income does not justify the benefit amount at the time of claim then this will be reduced to the maximum amount justified under this calculation.
Different approaches may be taken to repaying premiums in these circumstances depending on the insurer and facts of the case.
In these cases while a claim is paid the insured will not receive what they thought they had been paying for at a critical time for them financially and emotionally.
What are insurers doing at present?
Many insurers now have guaranteed payments up to a benefit level which ensures payment is made up to that level irrespective of a lower income.
Vitality and The Exeter give the option for financial underwriting to be done up front for some clients which then guarantees the amount that will be supported at claims stage.
In the short term some insurers that ordinarily apply a “use it or lose it” approach to indexation are allowing breaks to be taken from indexation for a period.
Advisers welcome flexibility in recognition of the extreme financial times we have been through. Scott Taylor-Barr, principal adviser at Barnsdale Financial Management urges insurers to “be bold and honour the level of cover that they have ended up giving and charging the client for if the only reason that situation has occurred is due to indexation on the policy”.
What are advisers doing at present?
It is acknowledged that mortgage advisers have a head start compared to protection specialists when it comes to certainty of information about income; for both, understanding the insurer’s definition of income is important.
Annual reviews, or at the very least regular correspondence that highlight when it is important to review your cover are important to ensure cover remains relevant and appropriate for the individual.
Anthony Andreoli, senior adviser at LifeSearch, emphasises the importance of explaining what to do when the policy is taken out: “Where my clients take out maximum cover to earnings I tell them to only take up the index linked risk at policy anniversary if their salary has gone up, and if in any doubt to call me.”
Taylor-Barr writes out to all clients when an insurer’s annual statement is sent out.
“This allows me to offer my assistance with any aspect of the statement they are unsure of, but also gives me the opportunity to invite them for a review of their plans,“ he says.
What can be done to improve this?
The Income Protection Task Force (IPTF) held two sessions to discuss this with advisers, insurers and reinsurers.
All agreed that annual statements and reviews have a vital role to play in ensuring the suitability of IP cover. There is even more need for this for IP than for life or critical illness.
Jack Southcott, proposition lead at The Exeter, said: “We’re pleased to have been involved in some robust conversations with the IPTF and advisers this year about how to protect customers that are at risk of over-insurance, which has the potential to damage the trust and reputation around income protection.”
A specific suggestion was that insurers could include on any annual statement or letter specifically detailing increases around options the actual income required for this benefit to be claimed upon.
This should point customers towards an adviser in the event that the income was higher than they are actually receiving in order to decide appropriate next steps.
Southcott continued: “At The Exeter, we have a flexible approach to indexation and try to provide certainty for members at claim stage with our fixed benefit option.
“As we head into next year, we’re working on improving our annual statements by including the required income our members would need to evidence if they have to claim, which came through clearly in the feedback from our recent sessions.”
What is happening next?
The IPTF wants to better understand how often this occurs, more about what advisers currently do to mitigate this risk and what more would be helpful for insurers to do here.
We will therefore be asking advisers for their recent and ongoing experiences in this space over the coming months.
If you have views that you would like to influence this please do contact us at the IPTF and we will report back on further findings here.