Look, no cover! Britons riding for a fall as they shun income protection

We all need financial security, yet sales of life insurance and other long-term policies fell by 20% last year
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The Independent Online

No one wants to think about how they would manage financially if they became seriously ill - or what would happen to their dependants if they were to die.

But ignoring the subject could prove an expensive mistake. That message has been hammered home by worrying new findings in this year's Protection Report, an independent analysis of the financial protection industry.

Year-on-year sales of long-term protection policies, such as basic life insurance and income protection, fell last year by nearly a fifth, to three million.

"No matter how you measure it, 2005 was not a good year in terms of sales for most health and protection insurers," says Andy Couchman, co-author of the report. "The life protection market should in theory be a buoyant one, given the basic need that almost anyone with dependants or financial commitments has [for cover]."

But this isn't the case.

These findings are echoed in the 2006 Swiss Re Term & Health Watch report, another annual assessment of the industry in the UK. Looking back at 2005, the report laments "yet another year of falling protection sales". This, it adds, came despite falls in the price of premiums for basic life cover and critical illness (CI) cover.

In particular, new sales of income protection - a type of insurance that pays out tax-free replacement income in the event of ill-health - fell by 9.1 per cent from 2004-05 and are now at their lowest recorded level since 1998. The product is in real danger of becoming marginalised because of its complexity, cost and a failure by consumers to see a need for it, the report says.

"The sector is still struggling to communicate the value of life and health protection products to consumers," warns the report's co-author, Ron Wheatcroft.

Swiss Re also underlines the precipitous fall in sales of CI, which pays out a lump sum if the policyholder is diagnosed with specific serious illnesses. One reason for this is the cost of premiums - they have in effect doubled since 2002, according to the protection broker Lifesearch.

The documentation of an industry in decline is clear but the reasons for it are contested.

"CI cover has received a lot of negative media coverage [about claims being rejected and delays in paying out]," says Lifesearch's spokesman, Kevin Carr. "But providers are now publishing their claims statistics, and this transparency is helping to improve consumer trust."

Swiss Re's report suggests that a slowing property market is to blame. "It's no coincidence that the fall in protection sales over the last few years has tracked the reduction in new mortgage transactions," it says.

Much of the concern in the industry turns on the distinctly "user-unfriendly" application forms drawn up by insurers. "People are put off at the idea of having to fill in a form that can run to 30 pages," says Mr Carr.

Other reasons cited are the complexity of products and lack of innovation in the market.

"Protection products are viewed as complicated and uninspiring," says Jason King from Life Policies Direct, a broker. "There's too much concentration on reducing premiums rather than innovation to attract new customers."

Sceptics will always complain that it's in the interests of insurers and brokers to paint a bleak picture to make us buy cover - and generate commission. But there is no denying the need for these products: the Co-op's insurance arm estimates that one in three people will be diagnosed with cancer at some point in their lives.

Many individuals and families are either failing to provide, or under-providing, against the most basic risks, says Donna Bradshaw from independent financial adviser (IFA) IFG Group. "As a nation we are grossly underinsured," she points out. "Nearly half of people have no form of life cover in place."

But it seems that many simply don't know where to start.

"Protection is generally 'event-driven'," says Mr Carr. "People only tend to take it out when they buy a house, get married or have children."

To find out how well protected you are, start by checking whether you have any cover through your employer. Many employment contracts include an element of income protection, for example.

Income protection should be a top priority, says Mr Carr; Ms Bradshaw agrees and calls CI "more of a luxury cover". Mr Carr stresses that the former gives better value for money than mortgage payment protection insurance (MPPI) and will pay out for decades rather than just a few years.

When looking for a protection policy, you may be tempted to go for the cheapest option but Mr Carr warns against this.

"It is vital that people get advice when they buy, so they can get a more suitable amount of cover at a more suitable price."

And unlike those who buy via a "non-advice" route - a high-street supermarket or a website - those who buy from an adviser will have recourse to compensation from the Financial Ombudsman if anything goes wrong.

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