Income protection must become a cornerstone of financial planning

Household budgets are still tight. In January, the FCA reported that around 28% of adults were still feeling the pinch – a marked improvement from the 36% who felt the same in early 2023, but still hardly ideal¹. 

In a tricky financial environment, income protection can provide a valuable lifeline should someone be unable to work due to illness or injury. In the past, the product was overshadowed by critical illness cover, life insurance and the various forms of general insurance. But now, with more people realising the importance of protecting their income in times of instability, income protection is stepping into the limelight, providing more people with valuable peace of mind. 

Shifting economic and protection landscape

We cannot discuss the UK protection market’s future without first examining its recent financial history. Inflation peaked at 11% in late 2022 and took almost two years to fall back to the Bank of England’s 2% target².

While the economic recovery has provided some much-needed support for households, the overall mood could be described as ambivalent: we are not quite out of it yet. Core inflation, which excludes more volatile factors like food and energy, is still higher than expected, and at the time of writing the Bank of England interest rate is still high at 5%³.

For many, these elevated interest rates have meant higher mortgage repayments and increased financial strain. Cost-of-living pressures persist and, with 1.6 million homeowners coming off fixed deals in 2024⁴, the outlook for many may have been concerning. Meanwhile, mortgage lending for house purchases is predicted to fall by 8% in 2024⁵, reflecting reduced buyer activity due to affordability concerns. As a result, traditional protection products tied to mortgages, such as life cover, have seen slower growth.

But in a time where every spare penny counts, income protection has quietly surged in popularity. Income protection sales across the industry increased by 8% in the first quarter of 2024 compared to the previous year⁶. UK workers are looking for a financial safety net, and it’s clear that income protection is a growing consideration.

Everything begins with education 

Awareness of income protection is on the up, marking a shift from the years when it was perhaps seen as less important. However, a general lack of education continues to hold its widespread adoption.

Let’s consider a worrying truth. Many UK workers overestimate the support they would receive if they could not work due to illness or injury. Research from The Exeter’s latest Health and Financial Fears Report revealed that almost a third (32%) of workers overestimate the value of Statutory Sick Pay, which currently stands at just £116.75 per week. In fact, only 27% of workers knew the actual amount, and 8% believed they would receive more than double what is available⁷.

This is a concerning misconception. Poor financial education leaves people vulnerable. In many cases, they believe themselves to be more protected than they actually are. Yes, the economy is slowly bouncing back, but the need for a financial safety net remains. Understanding the reality of statutory support is crucial to helping people recognise the importance of income protection in ensuring financial stability if they are unable to work due to illness or injury.

Consumer confidence and financial pressures

Increased awareness by itself is not enough. Inflation is levelling out, but living costs are clinging to historic highs, continuing to stretch household budgets. Mortgage repayments, day-to-day expenses, and energy bills - which rose by 10% at the start of October 2024⁸ are challenging people’s ability to save.

With this in mind, it’s no surprise that consumers may be hesitant to shoulder any new financial commitments. An ongoing challenge for us all is to position income protection as a safety net against potential financial hardship rather than an added expense in the eyes of consumers. Without income protection, an unexpected illness or injury could mean falling behind on mortgage/rental payments and wider financial commitments.

At the same time, the political landscape is shifting. The new Labour government is focusing on economic growth and boosting business productivity, which could help build consumer confidence. Should households become more secure in their financial outlook, they may feel more inclined to invest in products like income protection to safeguard their future.

Opportunities for growth

We continue to face a number of challenges but there are windows of opportunity to increase income protection sales. Consider renters. The UK currently has around 4.6 million private renters⁹ – a demographic that has traditionally been underserved by the protection industry. As housing prices remain high, more people are renting for longer and they are just as vulnerable to financial shocks as homeowners.

Unlike homeowners, who may have the safety net of property equity to fall back on in the worst-case scenario, the average renter could have fewer financial assets in times of need. Income protection offers a much-needed lifeline, ensuring they can meet their rental payments, and other essential outgoings should they be unable to work in the event of illness or injury.

Self-employed workers also represent a key growth market. Without access to employer-provided benefits like sick pay, the self-employed are especially vulnerable to income loss. Income protection provides a crucial buffer, allowing them to maintain their financial stability even if they’re unable to work for extended periods.

The mortgage market presents another opportunity, mortgage renewals present advisers with a perfect window to revisit protection conversations with clients to discuss how income protection fits into a broader financial plan – one that not only secures their property but also protects their wider income.

Reasons to be optimistic

Despite the financial challenges, there are reasons to be optimistic about the future. Interest rates are expected to continue falling, with forecasts suggesting they may drop to 4.75% by November and possibly as low as 3.75% by the end of 2025¹⁰. If this trend holds, it could have a positive knock-on effect on mortgage and rental costs, providing much-needed relief to households. Lower interest rates would also increase the likelihood of more protection conversations taking place between advisers and clients, especially with the increased focus on financial wellbeing under the new Consumer Duty regulations.

The October budget may also provide some reassurance. The government has ruled out major tax hikes on income, National Insurance, and VAT.  For the average UK worker, that’s a bit of a relief. A return to sustained economic growth, combined with stability in taxes and rising consumer confidence, would be the ideal environment for advisers to revisit protection discussions with clients, ensuring they’re better prepared for future uncertainties.

The UK’s protection landscape is changing, and income protection is at the heart of this evolution. As consumers continue to face economic uncertainty, the need for financial security has never been greater. Income protection is no longer just a supplementary product – it needs to become a cornerstone of financial planning for a wide range of consumers, from renters to self-employed workers to new homeowners or those renewing their mortgages.

This presents us with a fantastic opportunity to cover more people. It won’t all be plain sailing, but the future for income protection is definitely optimistic.

Sources:

1 - www.fca.org.uk
2 - parliament.uk
3 - www.bankofengland.co.uk 
4 - bbc.co.uk
5 - ukfinance.org.uk
6 - genre.com 
7 - The Exeter, Health and Financial Fears 2023
8 - www.moneysavingexpert.com
9 - nimblefins.co.uk 
10 - theguardian.com 

This article was originally published in FT Adviser on 06/11/2024 and can be found at www.ftadviser.com/protection/2024/11/06/income-protection-must-become-a-cornerstone-of-financial-planning