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Income protection holders risk limited pay outs

Written by: Paloma Kubiak
People who choose to buy income protection may not be shielded as well as they believe when illness or injury strikes, research reveals.

Income Protection (IP) insures people if they lose their income due to serious illness or injury, providing them with money while they undergo recovery or are unable to work again.

While a good safety net, the number of income protection products available today has fallen by 13% (from 56 in 2013 to 49 now), according to financial information business, Defaqto.

The number of providers operating in the market has dropped by a quarter, from 32 to 24, meaning consumers have less choice.

But the biggest blow to consumers is that there has been an increase in ‘limited’ term policies, paying out short-term rather than until retirement. As such, people are at risk in the event of a long-term claim.

‘Worrying shift’

Historically, IP policies typically covered the insured until retirement, but Defaqto has identified a ‘potentially worrying shift’ towards limited payment policies.

Whereas term-to-retirement policies pay an income from the date of the claim until retirement, limited policies only pay out for a set number of years, typically between two and five. These are likely to be cheaper upfront.

When an individual makes a claim, the insurer will pay out only for the term agreed, for example five years, rather than up until their planned retirement date. If the person is unable to return to work before the payment term is up, they could be left without an income.

Given that the average payment period for an IP claim is four years and some insurers report as much as seven years, Defaqto warns this is longer than any limited product currently available.

Five years ago, the majority (68%, 38 out of 56 products) only offered term-to-retirement cover, but today this has fallen to just over half (53%, 26 out of 49 products).

By contrast, today 47% (23 out of 49 products) offer fixed term payment options compared to just 32% (18 out of 56 products) in 2013. As such, the Defaqto data suggests the market is moving towards limited products, leaving consumers with less choice on term-to-retirement cover.

Income Protection 2018 vs 2013

Providers in the market Products available Limited term only Both options available Term-to-retirement only
2018 24 49 10 13 26
2013 32 56 9 9 38
Change -25% -13% 11% 44% -32%

*Data taken from Defaqto Matrix database

Ben Heffer, insight analyst – life and protection, at Defaqto, said: “We spend thousands of pounds each year insuring our homes, cars and gadgets, and yet we rarely think of insuring ourselves. If you had a machine that generated your salary every month, you would make sure that was insured, this is essentially what income protection is. If you get a serious illness or a life-changing injury, payments from a policy can offer you a financial lifeline and real peace of mind.

“While there has been a shift towards limited policies, having some IP cover is better than none and these policies can be great value for those on a tight budget. Income Protection is a complex product and anyone buying it should seek independent financial advice to make sure they get the right product for their needs.”

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