06. Income protection insurance Flashcards
What is IP?
An insurance against loss of earnings due to LT illness, incapacity or accident.
Why was IP formerly known as Permanent Health Insurance (PHI)?
Because it couldn’t be cancelled or premiums increased no matter how many claims, so long as premiums paid and policy conditions complied with.
What is the deferred period?
IP pays out after a pre-specified length of illness.
Benefit will be limited to a specified % of pre-claim income. What is this usually for both individual & group policies?
- individual = 50-60%
- group = up to 75%
Max age for payout is usually what?
SPA
What is limited term cover on the more modern policies?
Benefit payment period may last for a short term e.g. between 1 - 5 years.
What policies are designed primarily for the self-employed who have no sick pay arrangements?
Day one policies.
What is an alternative to day one policies and how do they work?
- ‘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.
What can sometimes be included as an add-on to IP, though is not a permanent insurance and can be cancelled/amended.
Unemployment insurance.
What are the 3 definitions of incapacity?
- own occupation
- suited occupation
- any occupation
If insured is not in paid occupation, benefit usually paid on failing what 3 possible things?
ADW, ADL or a FAT
What are most common deferred weeks and what do they normally tie in with?
- 13 or 26 weeks
- company sick pay
What is a split-deferred period?
Where places cater for individuals who receive full pay for a period then half pay for a further period.
What is rehabilitation benefit (aka back to work benefit)?
Paid where a claimant returns to same job but at lower earnings e.g. PT
What is proportionate benefit?
Paid where a claimant returns to different job e.g. less stressful job at lower earnings.
What do guaranteed insurability options allow?
Benefits to increase up to a preset limit on specific life events without need for further underwriting.
Name 3 potential non-financial benefits of an IP policy?
- access to online GP
- access to helplines / counselling
- EEE assistance programmes (EAPs)
What is waiver of premium (WOP)?
If policyholder suffers an illness or accident that prevents them from working, premiums waived.
What is limitation of benefit?
Prevents the insured be better off by claiming rather than working.
What do many policies also deduct from the max level of their cover?
The basic level of State sickness benefits.
Why is the limitation of benefit likely to be higher for group policies?
Because the EEE will then have to pay tax & NICs from their salary.
Underwriting for IP policies looks at ~ rather than ~.
- morbidity
- mortality
Why is underwriting for IP more stringent than underwriting for say, life assurance? [2]
Because there is a much greater chance of being too ill to work than dying, and a greater chance of fraudulent claims.
Name the 5 main factors which affect premium rates.
- age
- deferred period
- term
- smoking status
- escalation options
Once underwriting is completed, what are the 4 possible policy outcomes?
- 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
Physical hazards are where there is increased exposure to risk due to an individual’s job.
What is moral hazard? [2]
- 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
Cannot charge women more for higher morbidity risk since when?
2012 (EU Gender Directive).
What are the 4 occupation classes?
- 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
Rates are based on occupation class XXX as default, and what is applied to the other classes?
Extra loading.
The definition of incapacity is normally based on the insured’s occupation when?
Just before making the claim.
What are guaranteed premiums and what does that do to the price?
- Premiums remain constant through life of contract.
- Makes it more expensive.
What are reviewable premiums?
Premiums are periodically reviewed in light of the insurer’s overall claims history.
How frequently are reviewable premiums normally reviewed?
Every 5 or 10 years.
What are renewable policies?
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.
When making a claim, when & how should the insurer be notified?
ASAP and in writing.
What likely evidence would the insurer require during a claim? [2]
- medical evidence
- evidence of earnings
IP policy claims normally paid out to the earlier of what?
- return to work
- expiry of policy
- death
Name 5 common exclusions to paying out on IP.
- 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’)
Careless non-disclosure may lead to what?
Proportionate remedy being applied.
Deliberate or reckless non-disclosure may lead to what?
Claim being entirely rejected.
Under group IP policies, underwriting is ~.
simplified
Under group policies the company is the policy holder and pays premiums.
Are they benefits-in-kind for EEEs?
No.
How are benefits under individual IP policies generally paid, who to, and are they subject to income tax?
- gross
- direct to policyholder
- no
What is the main advantage of IP?
Provides an ongoing income to replace lost earnings during periods of extended illness.
What is a criticism of IP?
That it’s stringent underwriting process makes it difficult for all but the fittest to obtain cover on standard terms.
Name 7 things an adviser should consider for an IP policy.
- 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
