Inability to work due to illness or injury can have a catastrophic impact on a household’s finances. Traditional long-term income protection is designed to reduce the impact of this loss of earnings, by providing a replacement income until the insured is well enough to return to work, or reaches retirement or death. Yet despite the central importance of income in the maintenance of a comfortable lifestyle, the majority of workers in the UK have no income or expenditure protection whatsoever. Many also have no or limited savings to fall back on should they experience a reduction in income due to illness.

Despite the value of the product, the industry has failed to substantially increase the take-up of income protection. Sales are held back by cost, product complexity and consumer apathy. As a result, there remains a significant income protection gap. This does, though, mean that there is still huge potential for market expansion. Protection providers realise that raising the profile of the product among financial advisers, employers, policymakers and the public is key to its future success, and strides are being made in this area.

Mintel’s report examines these issues and trends in detail. By drawing on a range of information and trade sources, it explores the market’s prospects for growth over the medium term. Mintel’s market analysis is complemented by the results of an independently commissioned consumer survey, which provides insight into the attitudes and behaviours of those covered by both short- and long-term income protection policies, as well as general public perceptions of protection insurance.

Income protection – a long-term policy that is designed to replace a proportion of lost earnings in the event that the policyholder is unable to work due to sickness, accident or injury. Subject to certain conditions and level of cover, the insurer will pay, after a pre-agreed deferred period (eg four, eight, 13, 26, 52 weeks), a tax-free monthly benefit to the policyholder if they are too ill to work. The amount will usually be equivalent to between 50% and 65% (but can be up to 75%) of the individual’s gross earnings and is paid until the policyholder reaches their selected retirement age (usually between 50 and 70), or their recovery or death if these are sooner. The monthly premiums are determined via a detailed and personalised underwriting approach, and are usually fixed for the term of the policy. The longer the deferred period selected, the lower the premium.

This type of cover is also known as permanent health insurance or family income benefit and can be held jointly. It should not be confused with ASU insurance (see below).

Accident, sickness and unemployment (ASU) insurance –this is designed to provide cover for accidental death, disability and sickness, as well as unemployment, for a limited period. In the event of a claim, benefits are typically paid out on a monthly basis for up to a maximum of one or two years (unlike with an income protection policy, which is designed to pay out until the insured’s specified retirement age). As with other types of insurance, cover can be extended to a partner and/or children. This product is sometimes marketed as a form of short-term ‘income protection’.

Personal accident and sickness insurance – as above but excludes cover for redundancy.

Unemployment cover – provides short-term cover in the event of redundancy or other involuntary unemployment.

Personal accident insurance – a variant product, which pays out a lump sum (as opposed to a regular income) to the insured in the event of accidental death, serious injury or disability.

Mortgage payment protection insurance (MPPI) – a short-term insurance policy specifically designed to cover the policyholder against the inability to make monthly mortgage repayments due to accident, sickness and/or unemployment. The policy will pay out for a fixed period of time, usually a maximum of 12 months.

Critical illness cover – a long-term policy designed to pay a lump sum to the policyholder on the diagnosis of certain life-threatening but not necessarily fatal conditions such as heart attack, stroke, certain cancers, multiple sclerosis, loss of limbs, etc. It can be bought on its own (ie as a standalone policy) or as an addition (ie as a ‘rider benefit’) to other types of insurance, notably term assurance, whole life and endowment.

Life insurance – a long-term policy, which pays out a lump sum in the event of the policyholder’s death, with the purpose of protecting dependents against financial hardship. It is usually available on a single or joint life basis, with benefits including paying out on the diagnosis of a terminal illness. There are two main types of life insurance: term provides cover for a fixed term and only pays out if the policyholder dies within that term (providing cover for a set number of years and only pays out if the policyholder dies within that term) and whole-of-life (designed to cover the policyholder for the whole of their life, and as such guarantees always to pay out).

Long-term income protection is designed to replace a proportion of a person’s gross income until they are either fit to return to work or until retirement, or death if this occurs sooner. Unlike with certain State benefits there are no other time limits imposed, or means-testing to worry about.

Income from an individual income protection claim is treated as unearned income and is therefore not subject to income tax or National Insurance contributions. For this reason, the income replacement is always below 100% of gross earnings, typically between 50% and 65% (but can be lower or higher).

Since the benefits paid on an individual policy are treated as unearned income, they are taken into account when assessing entitlement to means-tested welfare benefits (although not entitlement to tax credits). For every £1 of unearned income a household receives, it will lose £1 in entitlement to welfare support. This is the situation under the current welfare system. Under Universal Credit, the impact on welfare entitlement will change. Notably, income replacements are likely to be slightly lower because the equivalent of tax credits will take income from an individual income protection policy into account when calculating entitlement.

In comparison, benefits from a group policy claim are paid by the employer through payroll, at a level equal to or below an employee’s salary. It is treated as earned income, and is therefore subject to income tax and National Insurance. Currently, for every £1 in earned income, entitlement to welfare benefits is reduced by 65 pence. Tax Credits are withdrawn at a rate of 40 pence for every £1 above a threshold, which varies according to household circumstances (eg presence of children, housing tenure, other earnings and savings).

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