ABI WELFARE <strong>REFORM</strong> FOR THE 21ST CENTURYThe financial impact of low savingsHouseholds that do not have large savings, or asource of income to replace the lost income,find themselves in serious financial difficulties,unable to meet financial commitments such as,mortgage or rent and other credit repayments.Increasing use of credit to make ends meet, butwhich they can not afford to repay, can lead tothem spiralling into unmanageable debt.The Citizens Advice Bureau report 6 thatIllness and disability was the third major reason survey (24% of clients gave this as a reason fortheir debt). In many cases, the debt had arisenwhen the client had to give up work because oftheir ill health. In other cases, the client had togive up work to care for an ill or disabledrelative. Not only do the clients’ income drop,but also their expenditure may rise becausethey need to keep the heating on for longer orrequire a special, more expensive diet”.It also matters to the economy. Households inthis situation are unable to pay their bills in full.They have to substantially reduce their spendingand therefore, the money they contribute to theeconomy through purchasing goods andservices, providing savings that can be used forinvestment, and through income tax, VAT andNational Insurance Contributions.In May 2014 the CBI reported 7 that in 2012the direct costs of absence to the economywere estimated at over £14 billion. Totalpublic sector spending on incapacity,disability and injury benefits in 2012-13 wasover £36 billion, with Employment SupportAllowance being claimed by 2.47 millionpeople in August 2013.The Malcolm / Zurich report showed that IPclaim payments mean that the State paysout less in welfare payments and receiveshigher taxes than when IP is not in place.Overall UK taxpayers already gain around£165 million annually from the presence ofGIP policies (£85 million from lower welfarepayments and £80 million from higherincome tax and National InsuranceContributions). Individuals with higherincomes also gain by £190 million than in theabsence of IP. If UK coverage of IP reachedthe same level as that seen in the US, thegains to UK taxpayers would be around£725 million.THE CITIZENS ADVICEBUREAU REPORTTHAT:“ILLNESS ANDDISABILITY WAS THETHIRD MAJORREASON FOR DEBTPROBLEMS GIVEN BYCLIENTS IN THE 2008SURVEY”.Gains for taxpayersLower welfarepayments£85millionHigher income taxand NationalInsuranceContributions£80millionTotal £185millionGains fromrehabilitationactivities£20millionIn addition, financial difficulties create intensestress, and over recent years have contributedto a substantial increase in the numbers ofpeople experiencing mental illness, with theobvious knock on effects on workplaceproductivity, family and social problems, andpressures on the healthcare system. The Frost / health disorders are one of the biggest causesof long-term absence and, according to anumber of business surveys, are on theincrease as a reason for absence. It isestimated that each year 1 in 6 workers inEngland and Wales is affected by anxiety,depression and unmanageable stress”. major driver for labour market exclusion in theUK. Each year mental ill-health costs the UKeconomy £70bn a year – the equivalent to 4.5%of GDP – through lost productivity, socialbenefits and healthcare costs. Mental disordershave become the most common reason for a new claims.”6 7CBI (May 2014) ‘Getting Better – Workplace Health as a Business Issue’8 abi.org.uk14
Income ProtectionThere are 17.4 million working households inthe UK. The IP market in the UK is small relativeto this group, and by international standards 9 . people covered by Individual IP (IIP) policies,meaning that individuals buy the insurancecover themselves, typically through a regulatedfinancial adviser. IIP may be particularlyattractive to the self-employed, who do nothave entitlement to SSP.Almost twice as many people - 2,016,000 – arecovered by Group IP (GIP), meaning policiesthat are arranged and paid for a group ofemployees by an employer 10 . GIP policies described above, through the payroll.IP policies vary in terms of the level of incomereplacement they provide – typically between50% and 75% of earnings before illness / injury.Income from an IIP claim is treated by thegovernment as ‘unearned income’ and istherefore not subject to income tax or NationalInsurance Contributions. For this reason IIPincome replacement is always below 100% ofthe previous gross earnings. IIP is designed toensure that a claim does not result in a netindividual income that is higher than before theclaim. Income from a GIP claim is paid by theemployer, through the payroll, at a level equal toor below income before the illness / injury. It istreated by the government as ‘earned income’,subject to income tax and National InsuranceContributions.When buying IP the consumer or employer canchoose what length of ‘deferral period’ theywant. The ‘deferral period’ is the time betweenthe individual stopping work due to illness/injury and when the policy starts paying thereplacement income. Deferral periods typicallyrange from 3 months to 2 years, althoughdifferent IP providers offer different options. Theconsumer or employer may decide they canuse other means to cover short term incomeloss, but want insurance to cover them ifserious illness or injury prevents work for a longperiod. The length of time for whichreplacement income is paid also varies. Somepolicies will pay until 60 or 65, while some payfor only 1 year, 2 years or 5 years.Having IP enables households to maintainincome levels at, or close to, previous earnedincome if they have to stop work due to illhealth or disability. This is illustrated in the casestudy below. This is for a working couplewithout children, who own their own home andmoderate to high earnings. Around a quarter ofa million families have similar characteristics andearnings to this. In this case, the household hasa relatively low income replacement rate (RR)without IP (41%). They are not entitled to anyState benefits because of the partner’searnings, so have to rely entirely on theirpartner’s earnings. But with IP their incomeremains much closer to its previous level, with a Young couple, healthy, both working, no children, own theirown house with a mortgage; IIP at 65%, deferred period ofone year - £18.35 per month premiumIN WORKAnnual salary: £35,000(+ partner earns £23,000)H’hold weekly income £860(£515 net earnings+£350 partner net earnings)ABI claims data 11 shows that in 2013insurers paid a total of £138,443,000 in IIPclaims to 12,004 households. The industrypaid 91% of IIP claims in 2013, which issubstantially greater than the one third ofESA claims that lead to a full ESA award.Around one third of IP claims are due to aprogressive illness. A further third are due tomental health problems – such as depression,anxiety or stress. Around one in six claimsrelate to a musculoskeletal condition.POST SICKNESS WITHOUT IPHousehold weekly income £350(partner earnings))POST SICKNESS WITH IPHousehold weekly income £705(£355 IP payments + partner earnings)RR41%RR82%9 10Black, C. and Frost, D. (2011) Health at work – an independent review of sickness absence, Department for Work and Pensions11https://www.abi.org.uk/News/News-releases/2014/05/270-families-helped-every-day-by-Life-Critical-Illness-Income-Protection-insurance-payouts-201315Follow us on Twitter @BritishInsurers