The Pitfall of Over Insurance in Income Protection

By Rob Higgins

A common misconception in income protection is the belief that having more cover is always better. At Cirencester Friendly, we support our Members in safeguarding their income against the unexpected. However, as a Senior Claims Manager with years of experience, I can say with confidence: being over-insured is not just unnecessary—it can be problematic.

Over-insurance happens when a consumer takes out income protection that exceeds what they can reasonably claim based on their earnings. Most insurers, including Cirencester Friendly, typically cap claim payouts at a percentage of pre-disability income—often around 60–70%. This approach ensures the benefit remains a safety net, not a financial gain.

Despite this, I continue to see cases where benefit levels are selected that surpass actual earnings. Sometimes this is done in error, other times due to fluctuating earnings, a misunderstanding of the cover provided or how claims are assessed.

This can have a dramatic impact when it comes to claiming, the hope of this article is to shed some light on this issue and perhaps provide some helpful tips on how Advisers can avoid overinsurance all together.

The real challenge arises when a claim is made. Consumers are often surprised and understandably disappointed when they realise, they won’t receive the full amount they are covered for. If a customer is over-insured, we must adjust the claim in line with their actual income, not their selected benefit level. This can create confusion, especially during an already stressful time when someone is unable to work due to illness or injury.

Moreover, in certain cases, customers may have been paying higher premiums for a benefit they will never be able to receive. This is an avoidable situation.

Why does over-insurance happen? There are several common reasons:

• Outdated income estimates: Customers may set their benefit level during application based on an optimistic projection of future earnings, but their income doesn’t grow as expected.
• Multiple policies: Some individuals take out income protection from more than one provider.
• Lack of Adviser input or support: Self-service applications can lead to inappropriate cover levels.
• Continued income: This may change over time and therefore mean the cover initially taken out is no longer fit for purpose, delivering poor outcomes for higher premiums.

Prevention is always better than cure. That’s why we can all do more to get better outcomes for customers who hold income protection cover. For Advisers I would recommend regular review of benefit levels, especially for self-employed or variable-income clients.

Advisers can help by ensuring that the cover reflects current income, not just desired income. To do this Advisers could:

• Ensure there is an annual review of the customer’s cover to ensure nothing has changed.
• Make sure the customer knows what material changes might impact their level of cover, should they need to make a claim, a change of occupation for example.

I want to ensure all customers understand what they’re paying for, and what they can expect when it matters most.

Income protection is a powerful tool. When aligned with real income and tailored to the customer’s needs, it offers invaluable support during difficult times. But when customers are over-insured, that protection may become a source of frustration and at times leads to complaints.

My advice to anyone considering income protection—or reviewing an existing policy—is simple:
be realistic, ensure the information you are working with is current, and remember individual circumstances change. Over-insurance doesn’t offer extra protection—it just offers disappointment.

Let’s work together—providers, Advisers, and customers — to make income protection work the way it should: fairly, transparently, and in the best interest of those it serves.