Mis-sales of PPI gave it a bad name, but for many it is a livelihood saver. Compensation bills for payment protection insurance mis-selling, endemic to the major banks, continue to eat into bank profits – last week, both Barclays and Lloyds were forced to make big increases in provisions.
But the consequence of this scandal goes far beyond the effect it has had on the bottom line of these companies. It has caused households to run scared of all forms of protection insurance, even the good ones.
Protection insurance is designed to pay out in the event of death or long-term illness, and can provide a financial lifeline if the family breadwinner is unable to work.
Policies vary, but typically they offer cover against death (in the case of life assurance) or serious illness with benefit paid in one go (in the case of critical illness), or in monthly instalments if you are unable to work because of illness or if you suffer an accident that prevents you working (in the case of income protection).
Kevin Carr, a protection insurance expert and the chief executive of think-tank Protection Review, says that many people are now reluctant to buy cover because they don’t believe it will pay out – just as few payment protection insurance policies ever paid out.
‘It’s a crying shame,’ says Carr, ‘because all households should have financial protection in place in case the breadwinner suffers a long-term illness or dies. There is a wide disparity between perception of the validity of protection insurance and reality. Research indicates that people think only a fraction of claims – 38 per cent – made on protection policies are paid out when actually the figure is closer to 90 per cent.’
Next month, an initiative backed by the insurance industry and charity Disability Rights UK will attempt to raise public awareness about the importance of income protection.
Called the ‘Seven Families’ project and the brainchild of Peter Le Beau of pressure group the Income Protection Taskforce, it will provide a year of financial support for seven families whose main breadwinner has been unable to work through sickness or accident. It will also provide rehabilitation support to help them return to work, either part time or full time.
The idea is to show how great the transformation in people’s lives can be when they receive benefit from an income protection policy.
Le Beau says: ‘I am conscious that protection insurance has got a bad name because of PPI. But with the continued scaling back of the welfare state, and the limited sickness pay available to most workers, income protection should be a priority for most people. I hope the results from the Seven Families project will emphasise this.’
Alan Lakey, protection expert at Highclere Financial Services in Hemel Hempstead, Hertfordshire, says it is ‘in everybody’s interest’ that income protection is taken up more widely. Monthly premiums will not break the bank, but they do become more expensive the older you are and the riskier your occupation, as well as if you smoke.
When Dave England bought an income protection plan 18 years ago, he never imagined that the insurance would prove a financial life saver. Not once, but twice.
But that is exactly what has happened. Now 39, Dave had a financial comfort blanket while he has grappled with two major illnesses – first pilonidal sinus at age 24, triggered by an ingrowing hair follicle at the bottom of his spine, which required a series of operations, and then chronic fatigue syndrome, which he still receives treatment for.
Dave, who is single and lives in Plymouth, started his working life as a radio presenter and producer for DevonAir and Plymouth Sound. But now he works part-time for Plymouth Music Zone, a charity providing music activities for disabled and vulnerable adults and teenagers.
He claimed second time around on his income protection policy three years ago following a deterioration in his chronic fatigue syndrome. Initially, he was receiving monthly benefit of just over £1,000 as he was unable to work at all.
However, he has recovered sufficiently to do voluntary work at Plymouth Music Zone and now receive some income. The monthly benefit has been reduced to just below £940.
‘When I was 21, I was carefree and a little suspicious about the merits of the insurance I had bought,’ he says. ‘But it has saved me financially. If I hadn’t bought it, I would have long ago faced financial armageddon.’
Article Reproduced from This Is Money