Worrying shift in the income protection market leaves workers at risk

23 March 2018

Workers are facing increasingly limited options in the income protection market, according to new research.

Financial information business Defaqto has found that the number of income protection products available is falling. Since 2013, eight providers have exited the market place, leaving just 24 in this space, a 25% reduction. The number of products available has also fallen from 56 to 49, a 13% decline.

Defaqto also found that the number of ‘limited-term’ products is rising. These policies tend to be more affordable for those on lower incomes and are generally less complex and easier to arrange.

However, the increase in limited-term products is a cause for concern as they don’t offer as much protection. In the past, income protection products that protect the beneficiary until retirement have been the norm. But, as the ‘limited-term’ suggests, these new products only pay out to the beneficiary over a fixed period of time, typically between two and five years.

If the beneficiary is unable to work when this term expires, they could be left without an income before they can access their pension savings. Of the 49 income protection products that were available, 26 were term-to-retirement, and 10 were limited-term only. The 13 remaining products had both options available. 

Term-to-retirement products have seen a 32% decline in options (26 down from 38) since 2013. Meanwhile, the number of limited-term products has increased by 11% (nine to 10) in the same period.

Ben Heffer, insight analyst – Life & Protection, at Defaqto, comments: “We spend thousands of pounds each year insuring our homes, cars and gadgets, and yet we rarely think of insuring ourselves. If you had a machine that generated your salary every month, you would make sure that was insured, this is essentially what income protection is. If you get a serious illness or a life-changing injury, payments from an income protection policy can offer you a financial lifeline and real peace of mind.”

You should also check whether the policy will cover you if you cannot do your specific job, called ‘own occupation’ cover, or whether it just protects you if you cannot work at all. For instance, a hairdresser who stands most of the day may have an injury that prevents them from doing this anymore, but they could do other less physically strenuous work such as at a desk. In some cases, the protection product will not pay out in this kind of situation.

Mr Heffer adds: “While there has been a shift towards limited policies, having some income protection cover is better than none and these policies can be great value for those on a tight budget. Income protection is a complex product and anyone buying it should seek independent financial advice and make sure they get the right product for their needs.”

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