The re-energised ABI Protection Committee and their policy team held a fascinating Round Table late last month, at which they unveiled a New Policy Institute (NPI) report on the impact of individual income protection (IP) on Universal Credit (UC), and the implication for policyholders. Their purpose was to demonstrate to the DWP officials attending the difficulties caused by the treatment of IP as unearned income and the consequent potential for UC, in some circumstances, to be lost £ for £ by those in receipt of Individual Income Protection. This potential loss has raised potential mis-selling concerns that currently hamper the wider provision of IP and this in turn conflicts with the DWP’s stated ambition to improve personal financial resilience in the UK. The ABI are trying to help the DWP resolve this Catch-22.
Listening to the NPI case studies left me feeling there was little chance of a competent adviser mis-selling IP. That’s because it became very clear that IP and UC are very different things and almost anyone with budget enough for the former should buy it irrespective of any reduction they might, or as likely might not, incur in actual UC payment. Let me explain that intentionally bold claim.
Working through the examples and the rules that drove them demonstrated that no normal person can predict with certainty the amount of UC they might receive were they to become eligible. Nor could anyone be certain that they would become eligible just because they could not do their job on health grounds. The uncertainty arises for two reasons:
- The complex interaction between each individual’s personal circumstances at the point of claim and the potential benefit level. Any variation in their savings level, their partner’s earnings or their number of dependent children for example could reduce or increase the benefit. So unless you can somehow predict your circumstances and your state of health over the rest of your working life, as well as what benefits future governments will allow, it is not a usable planning tool.
- Even if you got your predictions exactly right, your condition would have to leave you able to convince a DWP interviewer that you could not earn at all, not even the very low amounts UC offers. Many whose disability costs them their jobs will fail that test.
IP on the other hand, avoids those two critical failings in predictability. Provided you specify ‘own-occupation’ IP, your customer’s policy will pay out the insured amount if disability means they can’t do their job, irrespective of their particular household circumstances at the time of claim. They will face no means-testing bar possibly a check on their earnings at the time of claim. And they’ll face no DWP interviews designed to see if they could do another job of some sort or are hiding a bit of savings somewhere.
Never mind the very low level of UC benefits, the two things are surely different enough for the arrangement of IP to not constitute mis-selling even if UC benefit does end up being reduced £ for £ as a result. That case is made even more obviously defensible by the extensive preventative and rehabilitative services good IP policies offer nowadays. They have very real value in themselves. Perhaps one should make sure these are clearly explained to the customer and routinely service the policy such that they are taken up when needed, but an adviser should do that anyway, just like one should ensure that the IP benefit remains fully payable should your customer’s income vary. But I’m not sure even that proper level of service is necessary to avoid being judged as having mis-sold. That’s because there simply is very little real-world planning overlap between own-occupation IP and UC; the former will often pay out when the latter doesn’t. To put it simply, using UC as a vehicle for resilience planning is foolhardy. Those who want to make sure they are resilient against the loss of their income through disability need IP. Yes, in some circumstances it may reduce one’s UC benefit, but there is never certainty of that.
Perhaps the ABI should take the test cases in the NPI report to the Ombudsman and ensure they agree, but it seems to me they can present a clear cut case for IP that acknowledges the UC overlap, but makes clear that in the real world one is far better off with IP if one can afford it.
Given that clarity, what’s needed is marketing of the need for and benefits of IP so that consumers begin to know the name and advisers can introduce it into conversations without leaving consumers feeling they are being sold something they’ve never heard of before! Over to you ABI!