Budget-conscious consumers are increasingly forsaking insurance policies that would protect them through illness or redundancy as they seek to curb their spending in the face of higher living costs.
In recent months, insurance providers and brokers have seen a drop in sales of life and critical-illness cover, as well as policies that protect income and mortgage payments. Policyholders have been cancelling some policies – such as payment protection insurance – on fears they are over-priced and unsuitable. But they are also giving up, or failing to take out, other protection policies as they struggle to deal with higher mortgage costs, energy bills and food prices.
Policyholders cannot give up motor or buildings insurance as these are legal requirements, but they can sacrifice optional cover, such as income protection and critical illness, which they hope they will not need. Industry figures show that overall protection sales were down as much as 20 per cent in the first quarter of this year, compared with the same period last year.
“Mortgage payments are taking up a larger proportion of income, making it more difficult for people to pay for insurance cover,” says Iain Mallon, director of protection marketing at Axa.
He believes the protection market – which includes life cover, critical-illness and income-protection – could be down around 15 per cent this year and says other estimates signal a drop of up to 25 per cent.
One badly hit area is mortgage insurance, which covers monthly payments if holders lose their jobs or fall ill, or pays out a lump sum if they die. The number of mortgages taken out in recent months has dropped sharply, but brokers say those obtaining loans are still disinclined to pay the extra for insurance.
My Mortgage Direct, the broker, says that only one in five borrowers is signing up for life assurance alongside a new mortgage deal. Last year, around one in four took the protection and in 2002 a third of borrowers had the cover, according to Cath Hearnden, director. “As people have borrowed more and stretched themselves, there has been a drop-off,” she says.
She adds that clients who do take cover usually go for the cheapest option.
Figures from the Association of British Insurers (ABI) show that 171,000 new mortgage-related life policies were taken out in the first quarter of this year, 10,000 fewer than the previous quarter and 26,000 fewer than the same period last year. Sales of new mortgage-payment protection policies also fell in the second half of last year.
“There are two things working here,” says Mallon. “The number of new mortgages is decreasing and higher costs are making it difficult to afford protection.”
The ABI figures also show a slowdown in sales of life and critical-illness policies.
“I suspect it is becoming more difficult for people to meet their total costs,” says Trevor Bailey, director of marketing protection at Norwich Union. “Life insurance might be considered an expensive luxury in these times.”
However, advisers warn that it is during these unstable times that such policies can be useful.
“The great irony could well be that when people are feeling the pinch they look at various insurance products as a way to save money,” says Jonathan French at the ABI. “It is at times of economic uncertainty that these products come into their own, particularly those that cover unemployment.”
Advisers say the risk is that people cancel all their insurance policies and leave themselves very exposed if they lose their job or become ill.
Emma Walker, protection sales manager at Moneysupermarket.com says people could look for new deals that might offer fewer benefits but would save them money. For example, someone could give up critical-illness cover and keep basic life cover. Where choices have to be made, it may be better to sacrifice private medical insurance, for example, than income protection.
