You are here: Home - Insurance - News -

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.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Autumn Statement: Everything you need to know at a glance

Yesterday Chancellor Jeremy Hunt made his first fiscal statement in the role, outlining a range of tax measure...

End of Help to Buy: 10 alternatives for first-time buyers

The deadline for Help to Buy Equity Loan applications passed on 31 October. If you’re a first-time buyer who...

Moving to an energy prepayment meter: Everything you need to know

As households struggle with the soaring cost of energy, tens of thousands of billpayers are expected to move o...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week