Big buck, little protection
MONEY MANAGEMENT - 1ST MARCH 2003
More and more high earners are seeking income protection during these times of job uncertainty. But with companies offering low levels of payout, is it worth it?
What distinguishes the current spate of job losses from previous cutbacks in the UK is the relative affluence of many of the people affected. People working in the technology, media and telecoms (TMT) sector have been particularly hard hit. Typically, these will earn between £60,000 to £80,000 a year, topped up with a tranche of share options.
When the TMT sector collapsed, many people found themselves with large liabilities, principally large mortgages and reduces assets, since their share options were worth no more than the value of companies they worked for.
Insurers are beginning to see the effects of this. There is increased interest in income and mortgage payment protection insurance products from people with high incomes and large mortgages.
However, some IFAs are finding that the increased demand for high income protection is difficult, if not impossible, to meet. This is principally because most insurers and insurances that offer income payment protection insurance, accident, sickness and unemployment policies and mortgage payment protection insurance offer maximum levels of cover that are unrealistically low.
For example, the online webmoney income replacement plan from Pinnacle Insurance pays up to £1,000 per month.
Another online provider insureyourmortgage.co.uk, offers a maximum benefit of £1,500 per month or 65% of normal income, whichever is the lower, although it says that larger sums insured may be available. Policysure.com offers a mortgage safeguard policy with a maximum monthly mortgage payment of £1,200, plus other regular outgoings up to a maximum amount of £300.
Louise Harris, an IFA with Positive Solutions of the Newcastle based IFEA network, has become particularly aware of the problem. “I have several clients who earn more than £200,000 a year and some have rather large mortgages,” she says. “They want unemployment cover but have great difficulty finding the cover that they want.”
“Initially, the highest income benefit that I could find was £1,500 a month. This appears to be the industry norm, and it is completely inadequate for high earners. The mortgage repayment cost for one of my clients is £3,700 a month. Adding the extra 25% normally allowed would bring the income benefit required to over £4,600. They are not going to bother to take out a policy that pays out only £1,500 a month.”
Eventually, Harris tracked down a policy that offered a maximum benefit of £2,500 a month. Even this is often far from adequate, Harris says. “We are trying to get clients to realise that the Government will not look after them and that they must look after themselves, but we are unable to offer them adequate cover because none of the mainstream providers appears to have a suitable product. Obviously the cost would be higher than average, but in my experience clients would be happy to pay for the level of cover that they need,” she said.
The obvious solution would be for higher earners to take out a number of mortgage or income protection policies to achieve the level of protection that they want. However, this is not possible. Insurers will always insert a clause in income protection insurance or mortgage payment protection insurance policy warning that if a client holds any similar protection cover “they reserve the right to reduce the monthly benefit under the policy by an amount equal to the claim benefit payable to the client under any other such insurance.”
In other words, one policy will cancel out the benefits of another and the net effect will be a level of benefit that is no higher than that offered by a single policy.
A number of insurance brokers and underwriting agencies have found a partial way round this problem. They have topped up accident, sickness and unemployment policies with mortgage payment protection insurance policies or vice versa to provide more realistic levels of income protection.
One firm that has done this is Burgesses, a Braintree based payment protection insurance specialist broker that targets the mass market by undercutting mortgage payment protection insurance premiums of the high street lenders. It also provides income protection policies for higher earners through FDP Savill and Charcol.
Burgesses will combine two different income protection policies. One is its Shelter income protection policy, which offers a maximum benefit of £2,500 a month up to 75% of gross monthly income. The other is an income protection policy that provider a maximum benefit of £1,500 a month up to 65% of gross monthly income. The package therefore provides total monthly cover of £4,000.
Simon Burgess, managing director of Burgesses, reports a strong demand for such an arrangement. “With maximum benefit levels of £1,000 to £1,500 a month, the high net worth customer just does not think it is worthwhile getting income protection,” he said.
“But if you combine income protection with mortgage payment protection insurance it will not affect the benefits payable because they are not the same kind of policies”.
Other insurance brokers have done the same sort of thing. Berkeley Alexander, a Lewes-based insurance broker specialising in income protection, can combine two policies, SafetyFirst, an accident, sickness and unemployment policy with a maximum level of benefit up to the normal policy limit of £1,500 a month or 65% of the normal monthly income and Safetynet, with a maximum benefit £2,500 a month or 75% of the gross monthly income, whichever is the lower. Brokers earn 25% commission on all premiums paid.
Ted York, managing director of Berkeley Alexander, says, “The policies could have to be written simultaneously for us to agree the overall benefits with underwriters. It is unlikely that other underwrites – that is, not one of our schemes – would accept a second policy”.
York says that the reluctance of underwriters to underwrite large amounts of cover is behind the shortage of adequate income protection cover. “The reason that the maximum level of benefit sits at £1,000 to £1,500 a month is the nervousness of the underwriters, who are afraid of a massive explosion in claims,” he says. “Actuaries tend to base their estimates o what is needed on a previous unemployment period. That is why historically, maximums have been so low.
“Underwriters are very conservative people and in the last recession many of them got badly burned, and some withdrew from the market, altogether. They base the maximum benefits that they will underwrite today on the £1,000 maximum benefit of the early 1990s,” said York.
“It is completely unrealistic that a sum of £1,000 a month might well be enough to cover your mortgage but are the underwriters saying that you should never cover anything other than a mortgage? When people lose their job their whole income is gone.
“After pressure from IFAs to raise the maximum, we finally managed to find an underwriter who was sympathetic. So we said let us make sure we offer realistic level of benefit, £4,000 a month with a combined policy. That is the top level we could persuade an underwriter to accept.
“The policy does not have to be linked to a mortgage. People can use it for mortgage payment protection insurance and they do, but it has been structured as an income payment protection insurance policy. The other different is that benefits can be paid for 24 months. We have exploded the myth that accident, sickness and unemployment policies should cover income loss for no more than 12 months,” York said.
The underwriters, however, have asked for some guarantees that claimants will return to work as soon as practicable.
“We have had to come up with some features that would benefit both the client and the underwriter. So we have added on free back to work assistance and a stress helpline,” York said.
Both Burgesses and Berkeley Alexander use Compass, an underwriter that specialises in income payment protection insurance and UK unemployment and creditor insurance. It underwriters its UK and international business through a number of Lloyd’s facilities. The two key ones managed by Compass are consortia 9119 and 982. This gives Compass access to all of Lloyd’s UK and international licensing capabilities and their financial security rating.
However, even maximum levels of benefit of £4,000 a month may be nowhere near enough for the high net worth customer. “We don’t consider that out income protection policies cater for the top end of the market,” says York. “What we are doing is re-drawing the line for the average earner.”
He suggest other IFAs should do a fact find about what benefits employees are likely to receive from their employers. If they are senior, highly paid employees if is likely that their employer will provide up to 12 months of sickness cover.
IFAs should suggest that the client takes unemployment cover only, plus a deferred private health insurance policy. Employees may balk at the premiums for private health insurance I they have to pay them from day one. However, the cost of PHI will fall significantly if it is deferred.
