Income Protection Insurance: The New Cost of Living Cover?

Life has a way of bringing unexpected challenges that can shake your financial stability.  Consider, for example, Andrew, a self-employed contractor who falls from scaffolding, leaving him unable to work for many months, with no employer sick pay.  Or Lisa, a nurse and single mother, who is diagnosed with a chronic illness, compounded by sleepless nights worrying about how to support her children.   

These real-life scenarios highlight the critical role of income protection insurance (IP) in providing financial support when individuals are unable to work due to illness or injury. IP insurance serves as a safety net for people like Andrew and Lisa to receive a percentage of lost earnings and help them cover expenses until they can return to work.   

The Growing Demand for Income Protection 

Traditionally known as permanent health insurance, IP was once considered expensive, rigid, and difficult to claim, not to mention inaccessible to the mass market. Today, however, increasing awareness and post-pandemic economic uncertainty have fueled demand for more affordable, flexible policies that are within reach, especially to self-employed workers in high-risk professions.  

Changing work patterns, such as the rise of freelancers and contract workers, have increased demand for innovative, short-term income protection solutions. Insurers have started to introduce policies with shorter claim periods, multiple deferred options, and increasing flexibility in coverage at more affordable price points.  

The demand for income protection is on the rise. In the UK, sales of new individual income protection policies reached 247,000 in 2023, marking a 16% increase from the previous year and the highest level since data collection began in 2000. Globally, the income protection insurance market is projected to grow from approximately USD 43.15 billion in 2024 to USD 54.66 billion by 2032, reflecting a compound annual growth rate of 3%.       

Yet, despite this progress, a significant protection gap remains. Only 6% of self-employed workers have an income protection product that they purchased themselves, compared to 16% of employees surveyed. Many of those who need IP most – such as self-employed tradespeople or gig economy workers – are discouraged by complex underwriting and eligibility requirements. 

The growing demand presents a significant opportunity for insurers to reach this evolving market and increase revenue. Today’s insurers must be equipped with agile, configurable core systems that empower them to easily configure existing products themselves and to quickly and seamlessly adapt and change as time goes on. Only an optimised, agile core system can empower insurers to overcome the hurdles and meet market needs. 

Configurability: The Key to Meeting Consumer Demand 

To capitalise on the growing IP market, insurers must be able to design, launch, and evolve products quickly, without long development cycles or reliance on third-party vendors. Modern core systems must enable insurers to configure and modify essential product components, including: 

• Policy term (fixed-age or defined-period coverage) 

• Claim payment periods (short-term or long-term options) 

• Deferred periods (multiple waiting periods to suit various customer needs) 

• Escalation rates (automatic increases to align with career progression) 

• Pricing & commission structures (flexible pricing to suit varied demographics)  

• Reinsurance arrangements (customisable treaties and retention values) 

• Definition of income & incapacity (tailoring policies for various occupational groups) 

This level of configurability enables insurers to create personalised policies tailored to diverse consumer needs, including high-income professionals, freelancers, or renters seeking expenditure protection. Unlike traditional systems that require IT intervention for product adjustments, an intuitive, self-serve core system empowers insurers to launch and adapt policies independently, ensuring they stay ahead of market demands. 

The Future of Income Protection 

The IP sector, while still growing, has the potential to outpace critical illness cover in the coming years. As highlighted in Money Marketing, the industry is seeing a shift toward more customer-centric, value-driven policies. The Income Protection Task Force has also emphasised the need for greater awareness and accessibility, reinforcing the demand for innovative, scalable insurance solutions. 

One of the key drivers behind this shift is the ongoing cost-of-living crisis, which has made financial resilience a priority for individuals. With rising inflation and economic uncertainty, more people are recognising the need for income protection against unforeseen financial shocks. Insurers are responding by developing flexible and affordable IP products tailored to different demographics, from gig economy workers and freelancers to salaried employees in high-risk professions. 

For example, insurers are adapting policies to better support frontline workers, such as those in healthcare, education, and emergency services where long-term absences due to stress or injury are common. Some providers now offer enhanced cover for mental health-related claims, shorter deferred periods, and benefits like rehabilitation services and early intervention support. 

The IP market is also offering more options for varying employment structures. Products now range from traditional full-term policies to shorter-term income protection, which provides coverage for a set period, making it a more affordable alternative. 

Innovating Through Insurtech 

Insurtech innovations are also playing a role, with digital platforms simplifying the underwriting process and improving accessibility for a wider audience. Advanced core systems enable insurers to streamline policy management, automate claims processing, and quickly adapt products to evolving customer needs. With regulatory bodies and industry groups advocating for greater education around income protection, the sector is poised for continued expansion. As awareness grows and policies become more adaptable, income protection is likely to become a staple in financial planning for both individuals and employers. 

With economic uncertainty and the cost-of-living crisis, insurers must rise to the occasion. Those leveraging adaptable, AI-powered core systems like Sapiens CoreSuite for Life & Pensions will lead the charge, offering IP products that are flexible, affordable, and aligned with today’s workforce realities. Adaptability is not just an advantage – it’s a necessity.