Let’s prioritise income replacement strategies for working lives and not just for retirement

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What are your clients’ most valuable assets? Is it, perhaps their houses or maybe their cars?  Can you imagine for a second they wouldn’t insure them? 

But the truth is that neither of these things are the most valuable asset your clients own. In reality it’s their ability to earn an income. It’s the monthly salary that lets them pay the mortgage, buy their car, square up the grocery bills and jet off on holiday with their families. 

But somehow the thought of insuring that income has never quite managed to get to the top of the priority list and people will pick up a policy for their pet before they buy one that safeguards the money they live off. 

The impact of illness

Income is the foundation of everything we do in life and if a client couldn’t work through unexpected accident, ill-health or disability it’s likely they’d be unable to support their families and maintain their lifestyles.

According to The Centre for Economic and Social Inclusion there are 17 million working households in the UK and of these it says 10.8 million could see their income drop by over a third if the main earner was forced to stop working — and this includes any assistance they’d get from the State. For 6.6 million families, the findings show their income could plummet by more than half. 

The devastating impact long-term illness can have on a family is the reason that the 7 Families charity(Opens new window) was established. It provides financial assistance and practical help to families that have been hit by a serious or long-term illness or disability.

The extreme difficulty these families face(Opens new window) underscores the need to protect people’s income and begs the question why it remains an afterthought for so many. 

7 Families is a charity that we support. It plays an important role not only in assisting people financially, but also in raising awareness and really challenging everyone to think about how they’d pay the bills if they were unable to earn. 

The Association of British Insurers (ABI) is also working hard to shine a light on the need for people to safeguard their working life incomes. To this end it’s published a white paper that outlines the importance of income protection(Opens new window) in today’s changing welfare environment. 

Understanding income protection 

The general wisdom is that income protection is too complicated, but it’s no more complicated than a pension and people fundamentally understand how they work and what they’re for. 

The public know that they pay money into a pension and then use that cash to generate an income in later life. It’s a way of replacing their income when they stop working. 

If people thought about income protection in the same way then they might come to see just how important it is. Income protection enables customers to replace the income they can’t earn if they’re struck down by accident, illness or disability.

Focusing on income replacement

When we understand the need to save throughout our careers to build up a pension that’ll provide an income in retirement, it’s strange not to afford the same priority to making monthly payments towards a policy that ensures we don’t lose the income that supports us during our working lives. Income replacement should be a central theme to the financial strategies we employ for every stage of our lives and not just to retirement.

The continuing roll out of auto-enrolment provides an opportunity to get people thinking not just about the money they’ll need to fund their lives once they stop working, but also about the income they’d need if their career was stopped short. 

To make our income protection product fit for today’s market we recently made some changes increasing the upper age that policyholders can claim on their cover from 65 to 70. The maximum benefit has been pushed from £130,000 to £150,000 a year for personal income protection and the policy offers flexible levels of cover depending on individual client needs and budgets. 

Customers want certainty that their policy will pay out when needed so we’ve removed standard exclusions for alcohol and drug abuse, war and HIV. Our new income promise gives customers peace of mind in knowing the level of their benefit will be protected if they’ve seen fluctuations in their income since taking out the policy. 

These changes have simplified our income protection product. But with the ABI estimating that around 250,000 people leave employment each year due to ill health, we need to be upfront as an industry and openly discuss the financial impact this has on families — otherwise people will remain reticent when it comes to buying much needed cover.

Image of blog author Dougy Grant

Dougy Grant

Protection Director