Understanding the personal protection gap

What’s a personal protection gap to start?with?

The insurance insiders define the personal protection gap as the financial shortfall to maintain the current living standards if earnings were to stop due to illness, injury or death.

By some estimates, you’d be surprised to know that UK’s personal protection gap is at a staggering ￡2.3 trillion. ??

That’s pretty serious stuff. There are millions in the UK who are likely to get stuck in those gaps.

Personal protection insurance 101

Let’s be sure we are all on the same page while talking about ‘personal protection’.

Personal protection insurances are those that help you or your family make ends meet if the earnings stop due to illness, injury or death (mortality and morbidity risks). It isn’t one product but a suite of products built for this purpose.

To name a few,

• Life insurance
• family income benefit
• income protection
• whole of life

Unsurprisingly there is insurance for every perceivable risk these days.

But why would anyone need these insurances?

Well, let me share with you some significant reasons for the same.

1. Sadly only 24% of fully employed get meaningful sick pay.
2. Self-employed are left at the mercy of their savings, family or friends.
3. State benefits are meagre (be it JSE or PIP), meh! (you could always move to France or Spain)
4. Above all, we don’t save enough. ?? 70%+ of the households surveyed have savings that would not last past six months if they had a dig into it

So what’s the problem here?????

• The safety net available isn’t enough to support during these troubled times.
• There are insurances (literally) for every scenario. Yet, there is a massive under protection in the market.

Under these circumstances, what would one do if their earnings were to stop?

Why is this the?case?

We can dissect and put the issue of this massive under-protection into three buckets.

1. Distribution gap: All about how & where you purchase it
2. Insurance (product) gap: What are the products, what’s in them and who is eligible to buy them
3. Perception issues: Urgh! Those irrational humans.

Let’s dive a bit deeper into each one of those

1. Distribution gap

1.1 Awareness Issue

Beyond life insurance, many aren’t even aware of the plethora of insurances available to protect their finances or loved ones against the unexpected.

1.2 Access Issue

Once you have been aware of these insurances, the next question is, where do you buy them?

Procrastination will kick in, and if these insurances are not readily available in the channel of choice, they will remain at the bottom of the to-do list.

1.3 Non-digital sales

When you are all set & ready to buy, you get put with an adviser on the phone.

Nothing wrong with buying the insurance on the phone, but it’s 2022, and most of us would prefer to buy it online at our convenience

2. Insurance gap

2.1 Complex proposition

Siloed products, policies full of jargon & complex choices mean that most of us shy away from these insurances.

1. Policy terms: I wonder what’s more engaging, reading a policy document or the terms & conditions I accept every time I sign up on a website.??
2. Confusing & overlapping products: Say I want my income to be protected, so do I need family income benefit or income protection?
3. Tough choices: Having to choose policy amount, term, duration, waiting period.. gosh!

2.2 Arduous application process

When I navigate the maze and end up on the application, my next ordeal starts there.

The most intrusive part of the buying process is the application (underwriting). This health screening process consists of questions about my and my family’s medical history.

And it doesn’t end there. Often, people must get reports from their GP or do a medical screening. It’s not built for the mass market.

2.3 Non-inclusiveness

Sadly around 30–40% who want a cover cannot get it due to medical conditions. It can be argued that these people would need insurance the most, and the industry hasn’t done enough to address them.

It should be at the forefront of every insurer, a solution that works for nearly everyone.

3. Perception issues

3.1 Expensive

There is always a perception that insuring one’s income or life should be more expensive. After all, they are their most precious assets.

However, the industry has done little to educate customers that protecting their life or income could be more affordable than protecting their iPhones or iPads.

3.2 Trust issues

A common misconception is that insurers would always find a reason not to pay the claim. This stems from the general insurance (home, car…), where insurers tend to be more stringent in processing the claims.

However, unlike general insurance, with life, the reasons to claim are straightforward —

• you are either dead or alive
• you can either work or not due to illness or injury

More must be done to explain the claims process early in the sales process (awareness & consideration stage), so such common misconceptions are addressed early on.

3.3 Optimism bias

The unexpected won’t happen to me, so I don’t need to worry about spending money on something I don’t need.

Humans are known to be irrational decision-makers most of the time. Behavioural science coupled with personalised data-driven nudges can play a significant role in busting these biases.

The conclusion

With the rising cost of living and economic uncertainties looming over us, addressing the personal protection gap should be a priority for the insurance industry.

Over the years, there has been a lot of talk about this, but it’s time for some action. Addressing these issues requires radical measures.

• Simple & inclusive products
• Newer distribution channels
• Busting perception issues

Until they are addressed, the gap will persist, and many will go unprotected against the unexpected.

It is time to make insurance simple, accessible and a little less intimidating.