It is a well-known fact within our industry that there is a huge protection gap, with relatively few employees having access to income protection through work schemes. Myths around the product and its value are widespread. The time is right to face this challenge head on and present the true facts: income protection is needed, is important and is valuable to both employers and employees.
The size of this gap is highlighted by the amount of protection workers get in other countries, from both State and private sources. A recent report by the think-tank Demos showed that employees in the UK have much lower levels of protection than many other developed nations, such as the Netherlands, US and Canada. Around 1.8 million private sector employees in the UK are covered by income protection, although around 12 million people work for organisations that provide it, but only to a few of their workforce – who are typically senior managers. As a result, a staggering 9 out of 10 private sector workers do not enjoy the security afforded to the protected few.
To grow the income protection market we have to dispel the myths that have developed over the years and change perceptions both inside and outside our industry. It’s a commonly held view that income protection is only for senior executives, that it is too expensive, that employees don’t value it, and that the State benefit is there to protect those who need it. This is simply not the case. Protecting their income is the single most important insurance for anyone earning a regular wage. Without it, everything their salary pays for is put at risk. State benefits fall far short of being a viable alternative for most.
There has been a lot of focus on Welfare Reform lately. It is certainly an area of significant importance and with a direct impact to the protection gap issue. However, the Squeezed Middle – those earning between £16,000 and £50,000 per annum – are at risk even before any reform takes place since, should they be unable to work due to illness or disability, State benefits as they are today will not maintain their standard of living.
Let’s take the “average” UK family these days, where we have two income earners, a couple of kids, and a mortgage to pay. If one of them cannot earn their income, Employment and Support Allowance provides a maximum of £4,901 per annum from April 2011. Other State benefits exist, but are all means tested. By the time this family qualifies for those, their life as they knew it is destroyed, forever. Just as a comparison, for someone earning £30,000 – 40,000 per year, income protection cover would cost their employer around £200 per year, and this would guarantee 60% of their salary if they were off work sick for more than 6 months. That means they would still be receiving around £24,000 per annum!
As an industry, we need to address the main barrier to take-up of income protection: employees simply don’t understand the risks they face and are completely unaware of the potential solution. Employers want to offer benefits that staff value, and income protection has rarely fallen into this category. There is a real lack of information around this whole issue and education is needed to change the situation. Only when employers can see that demand growing can we hope to transform the market and see substantial growth.
So we get to the question of cost. There is a perception that income protection is an unaffordable option. It is not. Firstly, as mentioned before, schemes can be designed in such a way that the cost can be reduced significantly. Let’s not forget that for the masses that have no back-up plan at all today, something is better than nothing. Secondly, a number of companies could introduce income protection without increasing their existing benefit budget by rebalancing their existing benefit plan. For example, many companies offer life insurance for their employees, at four times salary and dependent cover – but no income protection. Did you know an employee is more than three times more likely to suffer long-term illness or injury than to die while of working age?
UK employees need and deserve a better back-up plan. Making cover available to all is not only the right thing to do for our industry and our customers, but is also right from a moral standpoint. One thing has not changed over the last 30 years: people still get ill. But one thing has changed: they now recover from it. However, although the majority of people will recover from their illness, they may never recover from the financial hardship that comes during the period they are out of work.
The key to changing the market is employee education. And the time is now. This is not a welfare reform issue, since State benefits are already inadequate for the majority. However, welfare reform puts the issue in the media spotlight and elevates its importance amongst employees
We are committed to changing this situation. But we can’t do it alone. We need the entire industry to put its weight behind it for the benefit of everyone.