Buyer’s guide feature – Income protection

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Providers insist income protection (IP) is one of the most important employee benefits, but demand still fails to match their claims. Market penetration has hovered around 10% for the last few years and providers are now looking at more innovative ways to increase its appeal. At the top of the list of turn-offs for employers is the cost. Providing income protection to a workforce costs anything up to 3% of payroll, and although premiums are guaranteed for two years, increases are the norm when the policy is up for renewal. "Premium increases are based on claims experience but with claims increasing, we’re seeing premiums rise by up to 15% and beyond," says Cheryl Brennan, national accounts manager for Gissings Advisory Services.

Providers are taking a two-pronged approach to keeping costs down and heightening IPs attraction to finance departments. The first line of attack is designing a product with lower premiums. To achieve this, insurers can provide a limited-term policy that will pay for anything from two years to five years rather than paying an income until the employee retires. "A short-term benefit that pays for two or three years is a lot more valuable than no benefit at all," says Colin Micklewright, income protection business development manager at Canada Life.

This limited-term approach means significant savings for employers. For instance, cutting the benefit period back to two years reduces premiums by around 60%. And, because the first two years’ cover are taken care of, it makes an individual policy much more affordable if the employee wants to take out their own cover. Product development in this area was ratcheted up a notch in 2004 with the launch of UnumProvident’s Capital Option. As well as offering a limited benefit term, it also pays a lump sum to the employer at the end of this period if the employee is unable to return to work. Gissings’ Brennan says: "This does give more flexibility to the employer. If they want to go for ill-health early retirement, the lump sum makes this easier." It appears to be a popular idea with employers. According to UnumProvident, sales are now very close to the £1.7 million target that it set last year. "We have positioned it as the ideal product for employers that have never [offered] income protection before, so it has attracted a lot of new business," explains Ann Hibbard, director of group marketing at UnumProvident.

As well as reducing benefits, providers are also taking a more proactive approach to claims management to help keep costs down. "Policies commonly have a 26-week deferred period but it is vital that we learn about a potential claim long before this point," says Nick Homer, product marketing manager for income protection at Norwich Union. Early notification allows the provider to take steps to avoid the absence becoming a claim. For instance, if an employee has a back problem they can be sent to a consultant or be given appropriate treatment to rectify it. "We can also supply occupational health assessors to advise on adapting the employee’s job, which helps ensure employers don’t break the law," he adds. Although this might sound like an entirely altruistic step on the provider’s part, they do stand to benefit too.

Once someone has been off work for 26 weeks, there is only a 50% chance of getting them to return, so claims can quickly add up to more than the cost of any early intervention. But it hasn’t just been existing products’ lack of appeal that have turned employers off this year. Market events haven’t made it easy for providers either, especially Swiss Life’s announcement in 2003 that it was withdrawing from the market. For policyholders, this meant that when their policies were up for renewal, there was no guarantee they would still be able to get cover. Providers did rally round at the time and, in a bid to offer some certainty to Swiss Life’s policyholders, UnumProvident signed an agreement to acquire the group’s employee benefits business. However, because of its market share, this raised antitrust issues, and the Competition Commission ruled that the deal could not go ahead. Subsequently it’s a free-for-all when the policies come up for renewal.

According to Gissings’ Brennan, this hasn’t always made placing the business easy. "We have been able to place all the there were a high number of claims the choice was much more limited." But don’t expect providers to give up on income protection just yet. A couple of factors ensure they’ll be pushing its benefits for a few more years. Graham Clark, director of group risk at Bupa, explains: "The shift away from final salary pension schemes will make income protection more relevant for many employers. It won’t be possible to fund ill-health early retirement with a money purchase scheme." The other change that is currently occupying providers’ product design teams is the way benefits are delivered. "[Providers] are still quite nervous about how to put income protection into flex schemes," says Brennan.

With premiums dependent on age and claims, providing a simple administration system is tricky. So far, only Generali has cracked this with a flat unit price for both the core benefit and any additional benefits. However, it’s likely it will have competition soon. "We’re developing administration solutions for this at the moment. This is important otherwise running income protection through a flex scheme just becomes an additional burden on the employer," explains UnumProvident’s Hibbard. And that would never help to give income protection the sales boost providers believe it should have.

THE FACTS What is income protection?

Income protection, which is also known as group permanent health insurance (PHI), income replacement and long-term disability cover, provides a replacement income if an employee is unable to work as a result of illness or injury. It kicks in after a deferred, or waiting period, which is typically six months but can be shorter or longer.

What are the origins of the product?

Income protection can trace its roots back to the 19th century when some of the friendly societies launched schemes to provide an income to members who were unable to work as a result of sickness.

Where can employers get more information and advice? Group Risk Development (Grid) is an industry body made up of intermediaries, providers and reinsurers to promote the advantages of group benefits including income protection. Its website ( contains information on the market as well as links to provider and intermediary sites.


What are the costs involved?

Costs vary between 0.5% and 3% of payroll depending on the age and number of employees, with large groups and younger workforces benefiting from lower rates. Premiums are guaranteed for two years, after which they will be adjusted in line with claims experience.

What are the legal implications?

"Employers should take legal advice to make sure they don’t over-promise," explains Nick Homer product marketing manager for income protection at Norwich Union. For instance, including a statement in the employment contract that infers a replacement income will be paid if the employee is unable to work due to long-term sickness or injury, may leave the employer liable if the insurer rejects the claim.

What are the tax issues?

Income protection premiums are treated as a trading expense so you will be entitled to corporation tax relief on them. In the event of a claim, benefits are paid gross to the employer, who then passes it on to the employee through payroll – so there will be national insurance (NI) and income tax liabilities. As well as covering their employees’ income, employers can also include the cost of their NI and pension contributions in the cover they take out.


What is the annual spend on the product? According to reinsurer GE Insurance Solutions, employers spent £509 million on income protection in 2003 covering 1.7 employees.

Which providers have the biggest market share? UnumProvident is the largest income protection player, with close to 50% of the market. In second place is Canada Life, which acquired Royal & SunAlliance’s group business in 2002, with just under 20% of the market share.

Which providers increased their market share the most over the past year? UnumProvident has grown the most in the last 12 months, in particular as a result of the acquisition of Liverpool Victoria’s and Sun Life of Canada’s business. The other insurers active in the market – Canada Life, Scottish Equitable, Norwich Union, Bupa, Friends Provident and Legal & General – have also seen their market shares grow as the result of picking up business after Swiss Life left the market.