Jan 20 – The shifting view on income protection
The phrase ‘mortgage protection products are sold; they are not bought’ surfaces time and time again. But this is true in a post-MMR (Mortgage Market Review) world where the core mortgage advice and application process takes a significant amount of time, resulting in protection conversations that too often happen too late in the process and consumers who are too far down the road to consider their own circumstances and the different product options available. They may decide to hastily buy life insurance as it seems like the sensible approach, but they may not necessarily understand what poses a greater risk to them and their family.
Royal London’s 2019 ‘State of the Protection Nation’ report demonstrates the gap between consumer’s perceptions and the reality; for example, 20% of consumers believe that they are likely to die in their working life whereas the actual chance of death of a male and female of working age (both aged 30, non-smokers and retiring at age 65) is in fact only 4% and 3% respectively. A much higher risk is the likelihood of being off work for two months or more, which stands at a 26% chance for males and 37% chance for females. Combine this with the fact that many people are only a few pay packets away from serious financial problems and you begin to see that there is a real need for income protection.
Demand seems to be on the up, which is positive for a product which in the past has suffered negative connotations as a result of the PPI scandal. FCA figures released in October 2019 show that income protection sales have steadily increased over the last 5 years, from 104,208 sales in 2014 to 160,722 by the end of 2018 – an increase of 54%.
But what has caused an increase in sales? It is likely that intergenerational factors have had an impact. Many people are in joint care roles, juggling both the needs of their parents and their grown-up children who, perhaps after going to university, find themselves back in the family home as a means of saving up a deposit for their first property. This demographic, dubbed the ‘sandwich generation’, may also have the responsibility of looking after grandchildren given the soaring cost of childcare.
Crucially, data from the Bank of England shows that the levels of debt for those over age 55 has increased by 47% in the last five years and is forecast to grow further. This often means that income needs to stretch further and for longer than in previous generations and therefore purchasing income protection is a means of ensuring financial stability.
Also, you cannot ignore the changing shift in employment in the UK. More precarious employment trends such as zero hours contracts, the rise in the gig economy and the increase in the number of those self-employed (ONS statistics show an increase in self-employed workers from 3.3 million in 2001 to nearly five million in 2019) may be forcing consumers to re-think their priorities, in comparison to those who are employed and may have income protection included within their company’s employee benefits programme.
But in order to continue to see growth in sales, income protection needs to be discussed with the consumer much earlier in the overall mortgage journey. When someone is buying a home there are many emotions involved, such as the stress and anxiety of dealing with one of the biggest financial transactions many people will make in their lives and this can understandably leave consumers distracted. One may argue that there’s not enough time to discuss income protection cover or consumers are not engaged with the idea. However, there’s been much debate at recent mortgage industry events as to whether intermediaries are doing a disservice to their clients if they don’t at least discuss protection insurance, especially if they claim on their business card to be a “mortgage and protection adviser”. There must be truth in this, as if it all goes swimmingly well consumers will be none the wiser if they weren’t sold income protection (or at least had a conversation) but if it all goes wrong, it could end up disastrous for not only the consumer but the firm too, as trust is broken and the value of advice heavily diluted.
Intermediaries ought to be frank with their clients that, whilst they are there to primarily assist with the mortgage, that mortgage cannot be fulfilled without an income. When you begin to drill down into that income and what the implications would be without regular money coming in, it does start to bring the topic to life. One idea that has been raised is that there ought to be a reimagining of the statement ‘your home may get repossessed if you don’t keep up with your mortgage payments’ so that, whilst the statement is still included for regulatory purposes, clients are also encouraged to consider ‘what would stop you being able to make your mortgage payments?’ By making this more personal, it allows for a natural discussion to evolve.
What is important is clarity around how income protection will not pay out an individual’s full salary and to also ensure that consumers are aware of any onerous provisions in the wording (such as medical condition exclusions), as this will help to mitigate the risk of complaints arising from a lack of understanding about the product or if a claim is not paid because of non-disclosure. Of course, this works both ways as there must also be an understanding of the consumer’s needs in the first place to avoid another miss-selling fiasco – it’s never going to be a ‘one size fits all’ situation. Consumers should be encouraged to review their company’s sick pay policy (many do not know their firm’s policy and overestimate how long their employer will pay for) and consideration given to any savings, as this can help shape the deferred period. Although a recent survey carried out by Lloyd’s Banking Group (October 2019) demonstrated that many people in Great Britain have low financial resilience, as 33% of people said they do not regularly save any money and 7% of UK adults have no savings at all.
Intermediaries frequently encounter the challenge of income protection being perceived by consumers as too expensive. Again, this may come back to changing consumer’s perception as whilst this is not a “fun” product a shift in general thinking needs to occur. Many consumers will happily pay £30 a month on a phone contract (whereby if you continue on the same deal at the end of the contract, you’ll effectively be paying for the handset again so arguably not value for money) but will baulk at the idea of paying a similar amount to cover their most important asset: themselves and how they earn a living. Income protection as a product lends itself well to making tweaks should affordability be an issue and if consumers are struggling financially or can’t see how the product fits in with their budget, perhaps more conversations need to be had about what they can afford and to work backwards to find a solution.
Another challenge is making sure consumers keep their income protection policies in force. If people are looking to make financial savings it’s these types of products that are likely to be the first to go, especially if a direct debit can easily be cancelled on a mobile banking app without a second thought. Engagement between intermediaries and customers and the demonstration of the value of advice is therefore key and is becoming more and more important in today’s landscape. This is a particularly salient point should the FCA decide to make changes which allow dual pricing between execution only and advised products, as consumers may be persuaded to forego advice.
AMI’s view is that protection is an important income stream for intermediaries and consider the ideal income to be derived from 40% mortgages, 40% protection and 20% fees. Furthermore, as product transfers have increased by 7.5% year on year (2019 UK Finance figures) they pose a bigger risk to broker revenue than remortgaging, given that the procuration fee is typically lower so alternative revenue streams, like protection, ought to be explored.
With the development of technology such as APIs (Application Programming Interface) and Open Banking potentially speeding up the main mortgage process by doing more of the ‘heavy lifting’, it is hoped that income protection sales figures will continue to grow. Innovation shown by some lenders is also encouraging, such as income protection products specifically for renters which acknowledge that, whilst there is a delay in home ownership amongst the younger generation as the average age of a first time buyer is now 33, there is still a protection need. There has also been significant progress made in providing cover for mental health conditions. Whilst there is still more to be done to reach certain demographic groups it is safe to say that, regardless of the political, regulatory and economic landscape of the UK in 2020 and beyond, the need for protection will always exist, and intermediaries are well placed to strike up that all important conversation.