Steve Bryan
|Director of Distribution and Marketing
Take a glance at any business pages or adviser magazine over the past weeks, and one key issue jumps out: the cost-of-living crisis.
ONS figures suggest that 90% of British households reported an increase in their cost of living in March, with a quarter of those surveyed struggling to cover the rise in bills1. This was before a £700 a year increase in energy bills2 and national insurance contributions3 took hold.
Concern amongst clients about rising monthly outgoings is likely to continue, given the ongoing economic uncertainty we face. Irrespective of age or income, whether they are homeowners or renters, it's likely everyone will be impacted in some way.
The approach taken by many is to tighten the purse strings, cutting down on the non-essentials. According to the ONS, 59% of adults who reported a cost-of-living increase were now spending less on non-essentials1. This could include insurance policies such as income protection (IP). But, in the face of economic uncertainty and higher prices, it could be argued this is when a client’s finances might be best secured through IP. So, what do advisers need to know?
Cutting back or snipping the safety net?
During times of financial hardship, protection can be seen as a luxury. Whilst it bolsters financial security, it is an expense that could be saved if more pressing financial needs emerge.
A recent study by HSBC highlighted a 45% rise in the number of people having no disposable income4. It’s, therefore, no surprise that some might be tempted to cancel existing cover or not purchase insurance products to have a greater amount of spending freedom.
However, IP is the guarantee of a client’s greatest asset should they be unable to work due to illness or injury. It helps to cover monthly outgoings, acting as a lasting source of support, allowing claimants to maintain their standard of living. In turn, this helps preserve any hard-earned savings they may have, which could be used to cover financial commitments.
The long-term value of IP
A client’s financial position is often not as secure as they may think. With inflation expected to hit 10% by Autumn 20225, their financial situation could become more challenging in the months ahead.
ONS data estimates that the average UK household’s expenditure is £2,548 a month6. If the main earner, on an annual salary of £45,000 is unable to work, debt could soon build. Even with two months’ employer sick pay and Statutory Sick Pay (SSP), they could accumulate £23,000 of debt within 12 months if their expenditure remained the same7.
Our latest IP claims data highlighted that the average length of a claim for policies with a full-term claim period was 101 weeks. Our longest-running claim has been ongoing for 25 years, demonstrating the impact illness can have on earnings and the long-term value the product provides.
Those to target
Many have felt a tightening of the belt, but certain age groups are feeling the pinch more than others. In March, a study by UCL found that 38% of UK adults said they were worried about their finances, with the figures nearly reaching half for those aged 30 to 598.
Unfortunately, this age range happens to be the most common age group for claimants on our income protection policies, with the average age of claimant in 2021 being 37 years old. Advisers should bear in mind that those struggling with their finances or looking to cut back by cancelling their IP policies are the most likely to make a claim.
Financial fallout
When discussing or reaffirming the need for IP with clients, it’s important to use their finances to demonstrate their potential vulnerability and highlight the benefits of IP in addressing them. IP provides that crucial safety net if they cannot work due to illness or injury and face growing household costs.
While it may be considered beneficial but not essential, advisers should aim to position income protection policies as even more necessary in times of rising prices to help maintain a client’s financial security when a drop in income could have severe consequences.
This article was originally published in FTAdviser on 31/05/2022.
1 - www.ons.gov.uk
2 - www.ofgem.gov.uk
3 - www.ifs.org.uk
4 - www.thisismoney.co.uk
5 - www.reuters.com
6 - www.nimblefins.co.uk
7 - The Exeter income risk calculator
8 - www.ft.com