06. Income protection insurance

Question 1

What is IP?

Answer 1

An insurance against loss of earnings due to LT illness, incapacity or accident.

Question 2

Why was IP formerly known as Permanent Health Insurance (PHI)?

Answer 2

Because it couldn’t be cancelled or premiums increased no matter how many claims, so long as premiums paid and policy conditions complied with.

Question 3

What is the deferred period?

Answer 3

IP pays out after a pre-specified length of illness.

Question 4

Benefit will be limited to a specified % of pre-claim income. What is this usually for both individual & group policies?

Answer 4

• individual = 50-60%
• group = up to 75%

Question 5

Max age for payout is usually what?

Answer 5

SPA

Question 6

What is limited term cover on the more modern policies?

Answer 6

Benefit payment period may last for a short term e.g. between 1 - 5 years.

Question 7

What policies are designed primarily for the self-employed who have no sick pay arrangements?

Answer 7

Day one policies.

Question 8

What is an alternative to day one policies and how do they work?

Answer 8

• ‘back to day one’ policies
• benefit not paid until after specified period e.g. 30 days of continuous sickness, but claim then backdated to pay from day one.

Question 9

What can sometimes be included as an add-on to IP, though is not a permanent insurance and can be cancelled/amended.

Answer 9

Unemployment insurance.

Question 10

What are the 3 definitions of incapacity?

Answer 10

• own occupation
• suited occupation
• any occupation

Question 11

If insured is not in paid occupation, benefit usually paid on failing what 3 possible things?

Answer 11

ADW, ADL or a FAT

Question 12

What are most common deferred weeks and what do they normally tie in with?

Answer 12

• 13 or 26 weeks
• company sick pay

Question 13

What is a split-deferred period?

Answer 13

Where places cater for individuals who receive full pay for a period then half pay for a further period.

Question 14

What is rehabilitation benefit (aka back to work benefit)?

Answer 14

Paid where a claimant returns to same job but at lower earnings e.g. PT

Question 15

What is proportionate benefit?

Answer 15

Paid where a claimant returns to different job e.g. less stressful job at lower earnings.

Question 16

What do guaranteed insurability options allow?

Answer 16

Benefits to increase up to a preset limit on specific life events without need for further underwriting.

Question 17

Name 3 potential non-financial benefits of an IP policy?

Answer 17

• access to online GP
• access to helplines / counselling
• EEE assistance programmes (EAPs)

Question 18

What is waiver of premium (WOP)?

Answer 18

If policyholder suffers an illness or accident that prevents them from working, premiums waived.

Question 19

What is limitation of benefit?

Answer 19

Prevents the insured be better off by claiming rather than working.

Question 20

What do many policies also deduct from the max level of their cover?

Answer 20

The basic level of State sickness benefits.

Question 21

Why is the limitation of benefit likely to be higher for group policies?

Answer 21

Because the EEE will then have to pay tax & NICs from their salary.

Question 22

Underwriting for IP policies looks at ~ rather than ~.

Answer 22

• morbidity
• mortality

Question 23

Why is underwriting for IP more stringent than underwriting for say, life assurance? [2]

Answer 23

Because there is a much greater chance of being too ill to work than dying, and a greater chance of fraudulent claims.

Question 24

Name the 5 main factors which affect premium rates.

Answer 24

• age
• deferred period
• term
• smoking status
• escalation options

Question 25

Once underwriting is completed, what are the 4 possible policy outcomes?

Answer 25

- issued at normal rates - issued subject to a loading (e.g. overweight, extra risk) - issued subject to an exclusion (e.g. due to past illness) - declined / postponed

Question 26

Physical hazards are where there is increased exposure to risk due to an individual's job. What is moral hazard? [2]

Answer 26

- Where someone is deliberately trying to over-insure to gain additional benefit, or; - where they are trying to insure themselves despite knowing they are in poor health

Question 27

Cannot charge women more for higher morbidity risk since when?

Answer 27

2012 (EU Gender Directive).

Question 28

What are the 4 occupation classes?

Answer 28

- **Class 1**: managerial, exec, admin, professional - **Class 2**: shop workers, skilled light manual workers, hotel & catering - **Class 3**: skilled workers in non-hazardous jobs - **Class 4**: skilled workers in hazardous jobs & heavy manual workers

Question 29

Rates are based on occupation class XXX as default, and what is applied to the other classes?

Answer 29

Extra loading.

Question 30

The definition of incapacity is normally based on the insured's occupation when?

Answer 30

Just before making the claim.

Question 31

What are guaranteed premiums and what does that do to the price?

Answer 31

- Premiums remain constant through life of contract. - Makes it more expensive.

Question 32

What are reviewable premiums?

Answer 32

Premiums are periodically reviewed in light of the insurer's overall claims history.

Question 33

How frequently are reviewable premiums normally reviewed?

Answer 33

Every 5 or 10 years.

Question 34

What are renewable policies?

Answer 34

Policies structured over a short term, e.g. 5 years, with guaranteed renewal at expiry where premiums are revised in line with the insurer's then rates.

Question 35

When making a claim, when & how should the insurer be notified?

Answer 35

ASAP and in writing.

Question 36

What likely evidence would the insurer require during a claim? [2]

Answer 36

- medical evidence - evidence of earnings

Question 37

IP policy claims normally paid out to the earlier of what?

Answer 37

- return to work - expiry of policy - death

Question 38

Name 5 common exclusions to paying out on IP.

Answer 38

- alcohol / drug abuse - dangerous activities not covered - pregnancy - war disabilities - criminal activity - non-commercial passenger flying - intentional self-injury - failure to follow medical advice - living abroad (outside 'free limits')

Question 39

Careless non-disclosure may lead to what?

Answer 39

Proportionate remedy being applied.

Question 40

Deliberate or reckless non-disclosure may lead to what?

Answer 40

Claim being entirely rejected.

Question 41

Under group IP policies, underwriting is ~.

Answer 41

simplified

Question 42

Under group policies the company is the policy holder and pays premiums. Are they benefits-in-kind for EEEs?

Answer 42

No.

Question 43

How are benefits under individual IP policies generally paid, who to, and are they subject to income tax?

Answer 43

- gross - direct to policyholder - no

Question 44

What is the main advantage of IP?

Answer 44

Provides an ongoing income to replace lost earnings during periods of extended illness.

Question 45

What is a criticism of IP?

Answer 45

That it's stringent underwriting process makes it difficult for all but the fittest to obtain cover on standard terms.

Question 46

Name 7 things an adviser should consider for an IP policy.

Answer 46

- **deferred period** - how long? EER sick pay? personal resources? - **definition of incapacity** - own suited or any occupation? - **benefit level** - how much? - **length of payment period** - to a specified age e.g. SPA, or shorter? - **indexation or increases**? - **guaranteed or reviewable premiums**? - **claims-paying history** of insurer