Income protection cover must mirror clients’ changing needs

As a financial adviser, you can play an invaluable role to help ensure financial sustainability for your client through a needs-matched product that is unique to them. But how much income protection cover is enough, and how should it pay out?

Current financial analysis tools consider a client’s current income, expected annual inflation, and the time they have left before they retire to determine a suitable lump-sum amount that represents the present value of the client’s financial need for the remainder of their working life. Capital disability cover that pays out a single lump-sum amount is still the most widely sold solution in the market for income protection needs. However, structuring this cover to meet the client’s needs at the claim stage is not that simple.

Shortcomings of traditional products

Lump-sum products are not always suited to the client’s actual needs, especially as the client’s needs may change. In the case of a client becoming permanently disabled without any impact on their life expectancy, they will face the very real prospect of not having enough money for the full duration of what would have been their income-earning years, if they can’t invest this once-off payment to generate the income they need. If the lump-sum amount falls short or investment returns are unfavourable due to adverse market conditions, this could mean years or even decades without enough to live on.

Lump-sum cover also generally contains significant premium waste, as it is structured to keep growing at a set rate for a set period, even though clients’ income needs until they retire decrease in line with the number of pay cheques they still expect to receive. While the lump sum suggested by the Financial Needs Analysis (FNA) tool is accurate at the time of purchase, after a period, it simply does not match the needs of a client.

Lump-sum cover also groups various insurance needs into a single cover amount, not considering the fact that the underlying needs being covered are different and exist for differing terms. For example, a lump sum will be in place until a client is 65, but some of the needs it covers – such as a mortgage bond or children’s educational costs – would exist for a far shorter period. Because of this, clients end up paying more from day one for cover they don’t need for nearly as long. The cost of insurance can be significantly decreased, if each need is covered appropriately for the correct term.

The importance of financial advice 

Everyone has different circumstances that are distinct from the next person. Their lives, needs and the people they love and want to protect all vary.

This is why financial advisers play such a crucial role. The ideal situation is to have insurance products that are designed to empower a client and financial adviser, that can enable the cocreation of the most suitable money solutions.

The importance of offering flexibility and choice

Our industry needs to develop more sophisticated quoting systems, analysis tools and risk protection solutions that not only calculate a lump sum, but can ensure that a client correctly allocates their income-protection cover to the different needs that are important to them.

Just as clients allocate their monthly income to different financial needs within a manageable household budget, they should be able to cover their childcare needs, debt repayments, and general household expenses through a sophisticated income protection solution.

A client should, with the help of their financial adviser, be able to control when and for how long they require cover for certain needs. By determining the appropriate periods that cover is required for and then matching the cover precisely to the client’s income protection needs over time, advisers can help clients remove waste, making cover affordable, while ensuring that clients’ needs are taken care of, at the right time. In addition, clients should have the flexibility at claim stage to choose between receiving a capitalised lump sum or an equivalent recurring payment, depending on their expected prognosis and financial situation at the time. These are some of the key principles that underpin BrightRock’s approach to protecting our clients’ income needs.