If you have time off work due to serious illness, don't expect the state or your employer to replace your lost earnings. Amanda Swinburn looks at why you can't afford to forget about income protection insurance.

Income protection (IP) has long been considered the poor relation of life insurance, private medical insurance and critical illness (CI) cover in terms of sales.

But now insurers are becoming increasingly innovative and making their IP products more flexible, so people can upgrade their contracts as they move house, face redundancy or change job.

Scottish Provident has set a precedent with the launch of Self Assurance, which allows customers to pick and mix from IP, term assurance, CI and unemployment cover. This has spawned several imitations.

Insurers still have a lot of persuading to do - currently, the market is small, with just over 1.6 million individual policyholders.

However, the public is becoming increasingly aware that the government expects people to take responsibility for their own welfare if they fall ill or lose their job.

Recent research commissioned by Scottish Provident showed that about four out of five (82%) respondents agreed that nowadays people have to make their own arrangements to ensure standard of living is maintained if something threatens it.

Yet only two in five said that they or their family have taken steps to ensure that their standard of living would not be reduced if they were affected by serious illness.

And only one in five (21%) said that they or their family had a large amount of savings to fall back on.

The `protection gap'
In terms of standard of living, 79% thought owning their own home was important, 74% deemed a car to be important and other items such as home computers and cable television were high on the list. Some 37% also felt that they deserved at least one annual holiday and 26% placed importance on eating out at least twice a month.

David Robinson, Scottish Provident's head of marketing and business development, says of the figures: "People appear to recognise the need to do something to maintain their high standards of living if they suffer a serious illness but not enough of them have yet turned that into action.

"Too many are kidding themselves that either it won't happen to them, or that someone else will look after them. When you see the costs of the items and services that people think are important for a reasonable standard of living today, there's an enormous `protection gap' between the action people have taken and what is required to maintain it."

Robinson believes a lot more needs to be done to warn people of the potential risks of not having IP insurance.

Mike Turner, product manager for Friends Provident, agrees: "The state and employers will never replace lost income if you are unable to work. In reality, people should prioritise income protection over life cover."

Industry figures bear this out. People are 16 times more likely to be off work for more than six months than to die before 65.

Before retirement, one in five workers will be off work for at least three months through sickness or accident.

But only 6% of employers offer IP to their workforce and very few employers provide sick pay for more than six months.

Added to this there is the increasing risk of being away from the workplace for some time.

Stress is fast becoming an epidemic. Norwich Union, which receives approximately 1,000 claims a year, says that one third are now for mental illness, including stress, with non-manual occupations like teaching most at risk.

A recent survey, commissioned on behalf of group IP provider Unum, revealed that more than two-thirds of 1,200 workers questioned felt either stressed or under pressure in the workplace, with 73% admitting that their performance was adversely affected by stress. And 83% of people felt that the situation had got worse in the last five years.

Figures from the Trades Union Congress (TUC) showed that two-thirds of 9,000 safety representatives questioned believed stress to be the top concern in the workplace. The main causes cited included workloads, cuts in staff, change at work, long hours, shift work and bullying.

Taking the strain
Over the last seven years, Unum has seen the number of claims for mental and psychological illness increase by 88%, while those for chronic fatigue syndrome have risen by 40%.

So what can insurers do to combat these startling figures? IP policies now include rehabilitation benefit, which allows a gradual return to work. For example, the claimant can be re-integrated back into the workplace by going back to work for a couple of days a week and can still receive benefits from the insurer.

Proportionate benefit can work in the same way - the claimant returns to work but in a less stressful role. They will receive a top-up from the insurer so they're not financially deterred from doing this by the lower salary.

A number of insurers, such as Scottish Provident and Permanent Insurance, offer confidential helplines for those suffering from stress.

Scottish Provident's head of product marketing Roger Edwards says: "People think insurance policies are all about paying out money but customers need more - they need a goal so they can recover and get back to work.

"And if we can minimise the time people are off work, it helps to keep down the price of the product for existing policyholders."

Karen Evans, assistant product manager for Friends Provident, adds that the job of the insurer is to make sure that people will be able to cope when they return to the workplace. "If they return to the same job, this can cause additional stress, so we look at all the options," she says.

Assured payouts
Friends Provident has won accolades for its IP cover - it has picked up the Plan Savings Award for eight years running and has also come top in the Health Insurance Magazine polls for three years. The insurer believes the key to its success is the fact that it pays out on 95% of claims and there is a guaranteed income.

"We don't hide behind the small print, so IFAs know that we offer a good product," says Turner.

But this is not the case for the market as a whole. Industry figures show that for both CI and IP insurance, only 50% of the money made from premiums is paid out to policyholders. And if customers are unable to carry out their own occupation, the claims can be rejected if the claimant can still do other work.

So if the market is to improve, potential customers need to be convinced of the need to take out cover and be assured that they will receive a payout if they make a valid claim.

Last year Unum, which holds 31% of the IP market, led the way with a campaign to raise awareness of the product among independent financial advisers (IFAs). This helped to boost growth in sales of the product to 36%.

The company is currently reviewing its marketing strategy in order to simplify information given to customers, so it is presented in a way they can understand.

"When telling customers what's covered, they also need to be told what is not covered," says McCormack. "It's important to understand the needs of the potential policyholder before selling a product."

Currently, the IP market is grossly under-penetrated, at 10% to 11%.

The competitive nature of the market means that insurers need to keep premiums in check and deliver a high-quality product to the consumer in order to boost growth.

Group Risk Development, the industry lobby group, is currently in talks with the government, looking at joint initiatives that will benefit insurers, as well as taking the strain off the UK's £100bn a year-plus welfare system.

The new initiatives could well help to bring IP to the forefront of insurance.