Income protection - significant opportunities in the local market
Income protection benefits will ensure that your clients will have an income and a reasonable standard of living if they become disabled. Despite the crucial necessity of such cover, income protection is undersold in South Africa, revealing a significant
“An income protection benefit is not only the first risk benefit your clients need when they start working, but it is also the first life insurance benefit they are likely to claim under,” says Stephen van Niekerk, Head: Momentum Myriad. “Income protection benefits also offer important advantages over lump sum benefits.”
The challenges
Why, then, is the take-up of income protection benefits so far below its potential? It appears that the main reasons revolve around a lack of awareness of how the product can meet clients’ needs - sometimes with intermediaries and often with clients; the perceived high cost of the product and the relative complexity and thus the level of understanding of the product.
Addressing a pressing need
“Take-up, and indeed retention, of income protection products, is largely dependent on the extent to which a product meets the clients’ needs,” comments Michael Porter, Marketing Actuary of Munich Re.
“Since the inception of new generation risk products, most insurers have focused their product development efforts on lump sum benefits.
Porter adds that in recent years, however, some insurers have attempted to better meet the needs of policyholders by, for example:
• extending cover to beyond age 65;
• paying up to 100% of pre-disability income in the event of permanent disability;
• providing cover which allows the insured to take time off work if a spouse or child becomes ill or disabled;
• adding non-occupational definitions and minimum payment periods; and
• making it less onerous to prove loss of income, especially for professionals and business owners.
Cost
Income protection is also perceived to be expensive, especially when compared to lump sum disability. “Since life insurance is a grudge purchase and people want to spend as little as possible, a lump sum disability is a much easier sell if you take the numbers at face value,” adds Porter.
However, he says, when comparing the relative cost of the two benefits, there are a few crucial issues things to consider. “Firstly, lump sum disability pays out only if a client is permanently disabled, whereas income protection also pays out for temporary disability. This is particularly important in light of the fact that the majority of income disability claims are temporary, especially for shorter deferred periods.
“Secondly, the income that can be bought with an equivalent lump sum payout needs to keep up with inflation and a portion of it will be taxed. And thirdly, a lump sum transfers the investment risk to the policyholder, which should needs to be allowed for in some way.”
Complexity
Income protection benefits are also complex, with many rules and options which vary significantly between various insurers. “Therefore benefits are generally not well understood by advisors and often don’t find their way into the financial planning process,” says Porter. “To address this, life insurers and industry bodies should actively promote the importance of income protection benefits, life insurers should steer clear of overly complex product designs, and advisors should understand these benefits properly to give best advice.”
The opportunity
“The fact that income protection benefits are undersold presents significant selling opportunities for intermediaries,” says van Niekerk. “For example, many salaried employees do not have group income benefits, and those who have, often need top-up cover, as these benefits cover only pensionable income, which can be much lower than the cost-to-company income. According to statistics, of the employees covered by group schemes, only approximately 25% have income protection benefits. Furthermore, group schemes on average only cover 60% to 80% of total cost to company. This leaves a viable market for selling income protection benefits among salaried employees, as well as to the many self-employed people and people working for small companies.”
