Income protection insurance: Why providers’ future success depends on flexibility

Clyde Parsons, BrightRock Chief Innovation Officer 

Financial advisers have long acknowledged income protection insurance’s place on the list of essential life insurance products. Despite this, lump sum-based disability solutions have historically stolen the limelight. This has changed in recent years, however, with increasing market recognition of the value of income protection insurance.

Some of this change is related to the pandemic, which has led a much wider client base to consider the importance of income protection insurance – many for the first time. 

According to findings from GlobalData’s 2020–21 UK Insurance Consumer Surveys, over 50% of people responding to a survey in the UK in 2021 said that the pandemic had influenced their decision to buy income protection insurance, up 15% from 2020. In South Africa, studies suggest that almost 35% of income protection insurance claims in 2020 were related to the physical and mental effects of Covid. These visible benefits have gone on to spur interest among new clients. 

A second key contributing factor is that income protection products are increasingly tailor-made to suit clients’ specific needs. And it is in this that clients are starting to recognise their indisputable value.

Income protection insurance over the years

Income protection insurance has a history spanning some 100 years in South Africa, with the first claim ostensibly paid to a railway worker who lost his eyesight in 1924. Over time, it gradually formed part of many group risk benefit arrangements.

It took slightly longer for smaller businesses and entrepreneurs to consider including it in their insurance packages, where cost considerations often that income protection often lost out to permanent disability cover, if any disability cover was paid for at all.

All of this is changing, however, and as businesses deal with the impact of Covid as well as global economic fluctuations, interest in this product is increasing, both for individuals and group risk schemes.

With the seismic shifts the world has seen in recent years showing no sign of abating (the rise in inflation, interest rates, and the cost of living seems to have no ceiling), clients are counting their pennies, even as they try to assess how much they might need in an uncertain future.

This environment can hit lump sum pay-outs quite hard, as the value of lump sum is more likely to be eroded by economic volatility. Adverse investment conditions mean that clients might not be able to receive an annuity income from their lump-sum investment that corresponds to their income needs, which means that their pay-out might fall short. To really be effective, income protection solutions need to consider clients’ circumstances at payout, which of course, can be difficult to predict. 

Providers that are innovating in this space, however, are finding a way to cater to clients’ changing circumstances and needs.

The rise of flexible plans

Rigid and uncompromising income protection plans are a thing of the past. And providers who insist on using them will lose clients to those who have proven their adaptability.

Today’s most comprehensive and flexible plans remove unnecessary barriers to claim and provide real guarantees, both with regard to premiums and pay-outs. They also don’t require clients to notify them if they change occupations or careers, or if they pick up a hobby after the underwriting stage that is considered risky. They also offer flexibility in terms of waiting periods and don’t aggregate pay-outs against active income.

Needs-matched life insurer, BrightRock, has not only pioneered many of these features but has in effect dismantled the divide between lump sum-based and income-based disability cover. It offers the only product on the market that allows clients to change their lump-sum pay-out to a recurring pay-out on guaranteed terms when they claim, without the risk of losing the payment entirely if they die shortly after the disabling event. This means that clients only have to decide which option suits them best once they have a clearer sense of their short, medium or long-term health, their financial circumstances and prevailing economic conditions.

Once an income protection claim is approved, BrightRock also doesn’t reassess the claim and stop payment if the client has recovered, or reduce pay-outs against active income, giving clients absolute certainty.

Income protection insurance is gaining in popularity and, in the current environment, more relevant than ever. But, if financial advisers are going to capitalise on this opportunity, they need to be sensitive to the needs of their clients. There’s no longer any appetite for restrictive and limiting clauses. Instead, providers that put clients in the driving seat by offering solutions that can keep pace with changing times are more likely to earn their long-term trust, respect and loyalty.