Income protection’s role in the protection mix

There has been a debate about the increase in income protection recommendations and even some speculation about whether income protection could eventually overtake critical illness insurance in terms of policies sold.

At Guardian we think the increase in income protection sales is a welcome development.  It’s great to see that more clients are recognising the impact illness could have on their income and looking to mitigate that risk.

But, when it comes to a discussion of which type of protection is best, it doesn’t need to be an ‘either/or’ conversation.  Our view as a provider of critical illness cover and income protection is that there is merit in each, depending on client circumstances and indeed, the ability to put forward a bespoke menu recommendation is very powerful.

Trends in product types across the market

Looking at the overall trends, the good news about income protection comes in the context of a fall overall for the year in long-term protection insurance. The Swiss Re Term and Health Watch report for 2023 (published this May) showed that term, whole of life, critical illness cover and income protection were down 5.5% in 2023 compared with 2022 ¹, no doubt driven by the economic context.

In 2023, income protection sales were more than a silver lining. New income protection policies increased by 10%, rising to 198,566 with growth in both ‘to retirement age’ products and 2-year limited payment term products, which grew by 12.5% and 12.2% respectively.

What’s driving these trends?

We also know all too well that our customers and your clients have faced some very testing times from the pandemic and subsequently soaring costs often including mortgage costs. It’s very likely that these costs are reflected to a degree in the contraction in overall sales.

However, we’d say to anyone trying to understand the market to not just accept that obvious explanation or at least not solely. For example, our research with advisers over recent years, confirms that we did see a change in clients’ attitudes because of the challenges to their health and wealth posed by the series of crises.

We might suggest that with changing priorities and even mindsets, some clients may be more open to income protection and what it can do for them. The ability to control costs by selecting a longer deferred period, or shorter payout period, may also be a factor in income protection’s growing popularity but we need to talk to advisers to really get a full picture.

Anecdotally, we know that more advisers are considering, discussing and recommending income protection so it may be that years of work from protection market influencers, among them many advisers, and important work by the Income Protection Taskforce may be coming to fruition.

So what do we predict for the future?

In the past, when we’ve wanted to improve our understanding of the protection market including product design, we’ve asked advisers’ views. That can be in our everyday contacts and with regular surveys.  It also helps to examine the profile of the business placed with Guardian and of course combining this with the big sector-wide surveys, such as that done by Swiss Re, and quoted above, although we do have to remember they tell us about last year with its very high inflation, rather than now.

What our own data is showing

To date, nearly 60% of Income Protection was recommended alongside other covers, with the balance sold stand-alone ².

Out of those sold as a menu, unsurprisingly, more than half (51%) was sold with life cover. Something we call ‘the Dynamic Duo’!

However, to re-emphasise the point that it’s not always ‘either/or’, almost a third of Income Protection is being sold alongside Critical Illness Protection or Combined Life and Critical Illness Protection.

Another interesting and, we think, encouraging statistic is that Income Protection with Children’s Critical Illness Protection made up a healthy proportion of sales where Income Protection was sold along with something else.

So what can we conclude about the mix going forward?

In very general terms, what I think we can see beneath the ‘more income protection trend’ is a lot of considered advice carefully attuned to client’s needs, attitudes and indeed budgets all being met by a mix of covers.

Then stand-alone may be meeting a specific financial planning need or simply be the preferred means of insuring mortgage payments, for example.

We also hope that within this, various features of the products within our own menu are also helping make the case for an intelligent blend, whether it’s choosing between our 2 different life covers for different budgets, or factoring in that we have Premium Waiver as standard and which kicks in after 28 days with Income Protection regardless of the deferred period, Payout Planner with life cover and our cover upgrade promise on critical illness cover.

We welcome your views

Yet we have set ourselves a little task and indeed hope advisers will help. Rather than just taking the increase in income protection sales as read and moving on, it would be great to understand why advisers think it is happening and any further implications.

We’ll be asking advisers for their views in the coming months including why and whether they think the trend will continue, and whether income protection might even overtake critical illness cover as the main additional cover to life covers in a ‘Dynamic Duo’ protection recommendation.

Our experience in these years of significant turmoil is that if you can create a kind of 3D view of what is happening, then the better you can position yourself to meet customer demands and customer needs in future.

Rach’s article was published in Health and Protection on 17 October

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