Cover magazine article September 2015
Over many months the Income Protection Task Force have been considering future policy options for IP. I want to share some personal thoughts with you. Driving the work is the roll-out of universal credit (UC) which will mean that most benefits will be merged into one on a means tested basis and that individual IP (IIP) will be taken into account £ for £ against UC. The effect will be that customers who have bought IP could find themselves no (or only slightly) better off with this decision than those who do not provide for themselves. So what should be done about this?
Let’s start with the Government. Many have suggested treating IIP like group IP (where it is treated as earned income with a disregard against UC and taxed). This doesn’t work for me. That individual IP is not taxed is not something that should be given away lightly. It could also impact on other products such as critical illness insurance (CI) and life insurance which are also not taxed. Group income protection insurance (GIP) works as a payroll solution where people never need to go near the benefits system. That is not the case for many who get IIP payouts. So what should be done? The answer is actually pretty simple. IP should be subject to a disregard, for example for every £ of IP received 70p could be taken into account against IP. That way everyone who provides for themselves would know they would be better off and IFAs could sell the product without any worries about the welfare system interactions.
But what if the Government doesn’t do anything? Let’s start with sales. The easy option for IFAs is to stick to those with high income and big mortgages as there is no way that such people will not gain from IP. The more complicated option is to do a calculation of IP vs UC. Unfortunately that is not easy right now. A calculator could be made available to IFAs but it will lengthen the sales process further. It would also make it a very dangerous sell for those who do not use it – except for the customers you know are bound to be better off on IP. But, on balance, I think a calculator would be a good thing to have available.
So let’s move onto the product itself and insurers who design it. There is one good legacy from PPI and mortgage payment protection insurance (MPPI). If the income from them is paid direct to creditors it is not taken into account against UC. Customers cannot then claim UC against their mortgage payments etc, but that was the peace of mind which was supposed to be provided by these products. So why not do the same thing for IP. You could have a homes, loans and living costs product which is compartmentalised into each element. This could also give security to renters who may be concerned about the benefits cap and many landlords refusing to take benefits claimants. The living costs element would still be an issue but for those on higher incomes it would still be a good decision.
Finally we move to more dangerous territory. What if none of these things happen? We return to PPI territory again and possible miss sales. It is not difficult to imagine a Financial Ombudsman Service decision where the IP remains in payment but a proportion of premiums have to be returned based on the relationship between the amount of IP the person gains vs the amount of IP that is irrelevant due to offset against IP. That would put up premiums and mean that those who never claim would be subsidising the undesirable effects of the current IP/UC £ for £ interaction. Time to act to make things better!
Written by Richard Walsh and first published in Cover magazine