1 : 4 - Income Protection

Question 1

What are long-term Income Protection (IP) policies designed for?

Answer 1

To pay out when poor health is the issue.

Covering the insured until they recover, die, draw retirement benefits/reach a specified age or the policy reaches its expiry date, whichever is the earlier.

Question 2

What are shorter-term Income Protection (IP) policies designed for?

Answer 2

To protect a mortgage, bank loan or other payment, often in the event of temporary crises such as unemployment and redundancy as well as health issues.

Question 3

What is the difference between critical illness cover (CIC) and IP insurance?

Answer 3

Whereas critical illness cover (CIC) is designed to provide a lump sum benefit, IP insurance is designed to provide a regular income following an illness or accident leading to an insured person being unable to work.

Question 4

What was critical illness cover (CIC) previously known as ‘permanent health insurance’ (PHI)?

Answer 4

This income continues until the insured recovers and is able to return to work, reaches a specified age (the policy expiry date), retires or dies.

If the insured does recover and return to work, the insurer cannot normally cancel the cover based on the fact they know their risk has been increased, as long as the insured continues to pay premiums; however, this depends on the cover selected at the outset

Question 5

Who can an IP policy benefit?

Answer 5

Almost anyone who is working

Question 6

How is an IP benefit treated for an employed person?

Answer 6

The benefit can be tied in with any sick pay they receive from their employer

Question 7

How is an IP benefit treated for a self-employed person?

Answer 7

The deferred period might have to be shorter, but the need might be greater, as it is possible that an illness could lead to all income ceasing

Question 8

What are the 3 types of IP premiums available?

Answer 8

Reviewable premiums
Renewable premiums
Guaranteed premiums

Question 9

What is a Reviewable IP premium

Answer 9

Means that premiums may start off relatively low, but will be reviewed in the future and may increase every few years or so. In some cases, the premium may be reviewable every year, or every five years, to take into account changing circumstances.

Question 10

What is a Renewable IP premium

Answer 10

They are a variant of reviewable premiums, and are reviewable whenever the policy is due for renewal.

Question 11

What is a Guaranteed IP premium

Answer 11

They tend to be more expensive than the other two options, but are fixed for the life of the policy, which may be as long as 25 years or the maximum term offered by the insurer.

Question 12

Is gender a factor that insurers considered when calculating premiums?

Answer 12

In the past, gender was a factor, however, since the European Union (EU) gender equality rules came into force in 2012, this is no longer permitted.

Question 13

What is the deferred period?

What deferred periods are standard?

Answer 13

The period before any income is paid out.

4, 13, 26 and 52 weeks. (The longer the deferred period, the cheaper the cover.)

Question 14

How are occupations commonly split?

Answer 14

Into classes, typically 1–4

With Class 1 being the least risky, admin-based jobs and Class 4 being skilled workers in hazardous jobs.

Some occupations are simply too risky and are excluded altogether.

Question 15

What is incapacity cover?

Answer 15

Some insurers offer ‘own occupation’ cover where the insured will be paid if they are unable to undertake their own occupation

Question 16

When writing a new policy, how may commissions be treated (as part of benefits)

Answer 16

An insurer would normally consider this over the 12 months preceding the claim, though some may take an average over a longer period to determine the benefit payable. The limit is usually around 50–75%.

Question 17

How might state benefits affect the policy?

Answer 17

Any state benefits payable may reduce the maximum benefit, and benefits from any other policies may also reduce the maximum.

Question 18

How does the deferred period affect the premium?

Answer 18

The deferred period chosen has a significant influence on the cost of a policy: the longer the deferred period, the lower the premium.

Question 19

What types of exclusions will IP policies have?

Answer 19

These commonly include incapacity/illness caused by:

• infection due to, or caused by, HIV/AIDS
• normal pregnancy and childbirth
• self-inflicted injury
• criminal acts committed by the policyholder
• misuse of alcohol and/or drugs
• failure to follow medical advice.

Question 20

How are pre-existing medical conditions treated?

Answer 20

If the applicant has a pre-existing medical condition, such as back pain or a stress-related disorder, and the insurer does not offer a moratorium, they cannot claim on the IP plan if they are unable to work in the future because of these conditions.

Different providers can have significant differences in their policy conditions.

Question 21

How does IP differ from PPI?

Answer 21

PPI differs from IP as it covers unemployment as well as poor health. However, its main drawback is that it only pays out for a maximum of 12 months, or in some cases 24 months: if the insured suffers from a long-term illness or injury, they could still find themselves without a source of income for many years.

Question 22

How is IP insurance taxed?

Answer 22

Any payout received under an IP policy is generally exempt from income tax, unless the premiums were paid by the employer via the company.

In such cases, the benefits are paid directly to the company and are subject to tax.

Question 23

EG:

Sophia earns £40,000 pa gross. She works in a managerial role, and has no hazardous pursuits. If she were to suffer a long-term accident or illness, her employer would continue to pay her salary for a short time, but after her deferred period Sophia would receive £24,000 pa (60%) tax-free from her IP insurance policy

Answer 23

From a planning perspective, we would need to know what her normal outgoings are, what other income she might receive, and how much she has in savings to cover emergencies.

Question 24

What is Group IP insurance?

Answer 24

Group IP pays a proportion of an employee’s salary if they are off work due to accident or illness for a prolonged period.

Having group IP gives both the employer and employee peace of mind during what can be a difficult time.

Question 25

What is the benefit of Group IP insurance to employers AND employees?

Answer 25

Sickness and absenteeism can place an enormous strain on company financial resources. Group IP helps the employer to manage long-term sickness more effectively.

At the same time employees feel that they have the support of their employer during a very stressful time.

Question 26

What specific benefits does Group IP insurance offer to the employer?

Answer 26

• Employer/employee relations are strengthened in that both feel supported by each other.
• The company can provide financial assistance to employees at a reasonable cost.
• The company can manage the cost of sickness and absenteeism more effectively.
• The premiums for the policy enjoy tax relief on contributions.
• Company pension scheme contributions and employer NI contributions can also be included.
• The company can benefit from policy provider rehabilitation schemes.

Question 27

What specific benefits does Group IP insurance offer to the employee?

Answer 27

• continued sick pay when it is really needed
• support and reassurance from the employer
• a rehabilitation scheme provided by the insurer
• no benefit-in-kind tax liability.

Question 28

What deferred periods can Group IP be set up for?

Answer 28

13, 26, 28, 41, 52 and 104 weeks.

The longer the deferred period, the lower the premium.

Question 29

What is the cost of providing group IP?

Answer 29

Typically, between 0.5% and 1.5% of payroll

But this largely depends on the type of business and the type of jobs the employees perform.

Question 30

What type of employees would be cheaper/more expensive to insure?

Answer 30

Employees working in an office or administrative setting are cheaper to insure than those on a building site or performing jobs requiring manual labour.

Question 31

Who should consider IP insurance?

Answer 31

Those who:

• are employed and know that their employer will only pay their full salary for a limited time in the event of accident or illness
• are self-employed and know that without the ability to work, their income will cease
• have dependants who rely on their income
• have a lifestyle that they will not be able to maintain without a regular income
• do not have sufficient savings to draw from, except perhaps for only a limited time.

Question 32

How Long Is the Income Protection Benefit Period?

Answer 32

Once a successful claim has been made, the benefit will be paid each month/week until the earlier of:

• a return to health enabling the policyholder to return to work
• reaching the specified retirement age/termination date, or
• death of the policyholder.

Question 33

What are proportionate benefits?

Answer 33

The policyholder can also continue to receive the benefit payments if they return to work but in a reduced capacity.

Question 34

EG:

Let’s assume that the policyholder’s benefit amount is £30,000 per annum and some kind of accident/ illness occurs that stops the policyholder from carrying out the duties of their occupation. The policyholder may take a part-time job that pays a salary of £10,000.

Answer 34

IP insurance recognises that the policyholder is still unable to earn their normal salary due to the nature of the accident/illness, thus the gap between the part-time salary and the original benefit is filled by the insurance company: £20,000 per annum.

The policyholder still receives £30,000 per annum.

Question 35

How Many Times Can Claims Be Made?

Answer 35

IP policies allow the policyholder to claim as many times as necessary.

During a claim period, monthly premiums are waived by the insurance company but the policy remains in force.