Income Protection Knowledge
Our health always seems much more valuable after we lose it.
And that, perhaps, is the problem for those promoting income protection plans. People often don’t see the value in the cover until it’s too late.
The Centre for Economic and Social Inclusion (CESI) research for the Association of British Insurers (ABI) shows that more than 60 per cent of working families would lose over a third of their income if the main earner had to stop work, and four in 10 would see their income drop more than half.
The case should be compelling for your clients to ensure their families are looked after in the event they cannot work.
It’s a hard fact that more than half of us will get some form of cancer in our lives. 545 people each day are rushed to hospital with a heart attack.
With the advances in modern technology and medical treatment, at least seven out of 10 people survive but may not be able to return to work immediately or indeed again.
These events can have a dramatic impact on household finances. Most families are heavily reliant on the main breadwinner and the loss of that income would be massively detrimental to their lifestyle.
As with other forms of protection, uptake remains limited despite the obvious need. Few really think about the costs of illness and not being able to work.
The benefit of having cover in place to provide an income in such circumstances is therefore obvious, however clients do not always see this.
How can i4C help with this?
One of the main barriers that stands in the way of clients putting cover in force is cost and affordability.
As a planner you need to be able to demonstrate the need for the cover and providing that sleep at night factor for clients, if a client can not see the value and affordability of the protection, they will not proceed with putting the plans on risk.
Via the interactive use of i4C with the client and by incorporating the three pillars of cashflow modelling you can help to demonstrate to a client the impact of them not being able to work on the family as a whole via what if scenario planning.
Three Pillars of Cashflow Modelling
Alongside using i4C, use claim statistics to build confidence and demonstrate to them that providers now publish details of their successful payments to clients, for example in 2016 Aviva paid 92.6% of all claims made, totalling approximately £37 million.
Ensure they understand that long term illness can strike at any stage. 29% of claims made to Aviva last year were by policy holders under the age of 40.
Set the premium expectations at the outset so that a client isn’t surprised if the premium has been increased due to a lifestyle or health factor. On the issuing of terms and when the final premium is known, run an updated scenario using i4C to demonstrate that the cover remains affordable.
What are the key questions you should be focusing on for your client?
- Explore the detail of a clients expenditure, if they say they have a surplus every year, is this reflected in their savings?Focus on ad-hoc expenditure, car purchases, home improvements, weddings and the frequency of these one off expenses in addition to their regular expenditure.
- Consider how could expenditure be reduced in the event of the main breadwinner not being able to work.
- Thoroughly understand their employee benefits package, deferred periods and levels of cover. Until you know this information it is impossible to provide a recommendation.
- If Mr is unable to work, would Mrs be able to work, what kind of potential for earnings is there?
- Would family be able to provide financial support, at what level, for how long?
- How much of an emergency fund do they hold on deposit, what level of deferred period do they feel would be appropriate?
- Would they be happy sending their children to state rather than private school?
- Would they consider downsizing their home in order to free up liquidity, how would they feel if this was forced upon them?
The most important aspect of interactively using i4C and incorporating these questions is then recording the clients own words for their responses. There is nothing more powerful than being able to use a clients quote and the discussions had to demonstrate the suitability of your planning.
Once you have established the clients situation and objectives, you can use i4C to implement the three pillars of cashflow modelling to plan your way through the case with the client.
How to prove the need – The Case Study
Peter (62) and Theresa (57) run their own business which pays them a salary of £9,000 per annum each with dividends of £10,000 per annum each. The business is profitable and the majority of their expenditure is related to the business, therefore their own income need for their lifestyle away from work is modest at £12,000 per annum.
The business is reliant on Peter to continue and would cease to trade if he was unable to work. There is no value in the business for sale purposes. They plan to stop working when peter is 71 and Theresa is 66. They enjoy working and at the moment as long as their health allows they plan to continue.
They own their home which is valued at £425,000 with no debt. They have pensions valued at circa £50,000 and cash on deposit for emergencies of £15,000.
Pillar 1 – The Healthcheck
The first stage to consider when reviewing a clients situation is based on their current situation, future spending requirements and their objectives, will they be ok? Have they got sufficient income and assets to cover their expenditure currently and when they stop working?
in i4C this is referred to as the baseline scenario. There are numerous graphs that could be used to demonstrate that they are ok. in the simplest format, you can look at liquid assets plus money purchase pensions, alongside the cashflow summary graph.
As you can see from the graphs above, Peter and Theresa, assuming they can continue to work as planned with the same levels of spending will gradually accumulate assets overtime and will have sufficient income to meet their expenditure.
Pillar 2 – The stress test
However, even though on the surface, they are fine and their lifestyle has proven to be affordable, given the reliance of the business on Peter, it is important to stress test what would happen if he was unable to work and the business folded with their income ceasing. Do they still have sufficient means to maintain their lifestyle?
This can be done by creating a scenario to demonstrate the effect of Peter becoming ill. Again, we can use the same graphs as above to show this impact.
As you can see based on the above graphs, if Peter were unable to work from 2019, the current pension and cash on deposit would run out before Theresa’s state pension would commence. It is unlikely that expenditure could be reduced any further from £12,000 per annum so the reliance on their business income over the next 9 years is evident.
This highlights the need for them to consider income protection as an option in order to stop them having to adjust their lifestyles, consider downsizing their home etc.
Pillar 3 – Demonstrating the impact of planning
The policy would provide them with the peace of mind that if anything happened, they would be able to continue to live due to their basic expenditure requirements being met by an income protection policy.
Using i4C you can demonstrate the affordability and the impact of the policy whilst showing that by putting this in place, they are safeguarding their short term future until their state pensions commence.
As you can see from the graphs above, the protection policy would cover their income requirements, whilst also providing them with a small surplus each to build up some liquidity, and also any unexpected expenses which may increase their basic income need. The liquid assets chart demonstrates the affordability of this planning.
The same three pillar process can be applied to all cases through i4C and can be applied to other forms of planning alongside protection planning.
Further articles and supporting documentation can be accessed by i4C users via the knowledge community alongside videos demonstrating how to use i4C effectively with your clients.