Comment: December 2009

Income Protection (IP) often known as Permanent Health Insurance (PHI) pays out when people are ill and unable to work. It is a notoriously undersold product as the average person is several times more likely to be off work for more than six months before the age of 65 than he or she is to die.

Providers of these products are now being urged to follow the lead set by Critical Illness Cover insurance (CIC) and open up their claims payout records to customers’ scrutiny. It is hoped that making this data widely available will boost consumer confidence in policies. Some of the biggest providers have long held an unenviable reputation for doing everything they can to avoid paying out on a claim and unfortunately this has impacted across the industry.

Whether a claim is successful or not will depend on the insurers assessment of the policyholder’s disability and its effect on their ability to work. Most policies provided by the major insurers demand at least a four week deferred period before they will start paying a claim. The most common reason for not paying a claim is ‘non disclosure’ that is when applying for the cover, not disclosing a previous condition. While staying within their rules some insurers were less than honourable in the way they applied them. For example if claimant had forgotten to mention that they had had a cartilage operation on their knee but then claimed for a broken arm, refusing to pay because of a non-disclosure. The regulator, very properly has slowly been forcing providers to only exclude on a non-disclosure basis if the non-disclosure was relevant to the claim.

Friendly societies have long been the leaders in the provision of income protection and it is a pity that by no means all intermediaries realise this. The culture of friendly societies which were founded on the basis of mutual support means that they tend to pay out a very high proportion of the claims which are made. Cirencester Friendly Society for example, founded in 1890, has long been paying out around 98% of all claims. Moreover Cirencester, as do several other friendly societies, provides the ‘Holloway’ contract (based on a concept by George Holloway MP for Stroud in the late 1800s), which will offer day-1 payout. www.cirencester-friendly.co.uk

The Association of British Insurers (ABI) says it is looking very closely at publishing industry wide IP claims data on a yearly basis. The implementation of the Welfare Reform Act which replaced Incapacity Benefit with Employment and Support Allowance (ESA) and has the declared aim of reducing very significantly the number of people drawing state sickness benefits means that private provision had become even more important. Protection products do seem to have largely fallen off the radar of many financial advisers, which it should not have done. A needs analysis of the average member of the public would show that they would suffer significantly if they were off work for a long period due to illness.

The above is the lead article in our monthly CPD Digest. Please click here for information about the full Digest.