5. Income Protection Flashcards
What is IP?
- Long term contract providing insured with ….
- …. regular, short or long-term payments during periods of incapacity …
- … in return for regular premiums
Potential issues with writing IP business
- Incapacity definition and measures of fitness to work can’t always be assessed objectively
- Payouts are not always linked to current salary
- May be necessary to apply benefit limits
- Underwriting may be complex
- Could be exclusions
Main customers
- Individuals (usually self-employed)
- Employers
- Small professional practices
Premium characteristics
Can:
* Be waived when benefit is payable (usually a rider)
* May increase in line with regular increase in benefits
* Be guaranteed throughout policy term or be reviewable at regular intervals
Premium reviews
- Can change premiums <> experience of portfolio in TOTAL is different than expected
- May lead to selective lapses
Benefits (overview)
- Receive cash benefit
- Amount chosen by ph
- Benefit restricted by max benefit formula»_space; prevent over-insurance
- Proportional or rehabilitation benefit could be provided
Replacement ratio
Ratio of post-claim income to pre-claim income, net of taxes in both cases.
Over-insurance
- May arise if RR is too high
- No incentive to return to work
Benefit characteristics
Can:
* Increase at specified rate chosen by ph from start of policy (corr to increasing premiums)
* Increase at specified rate during period for which benefits are payable
* Paid at reduced rate if insured returns to work part-time or works in less well-paid job after incapacity
* Be available for fixed term or up to specified age, usually NRA
* Subject to deferred period at start of each period of incapacity
* Be subject to linked-claim period, so that periods of incapacity separated by less than the linked-claim period are treated as if they were one continuous period of incapacity
* Be increased without further evidence of health, if a life event specified in policy occurs and ph has opted for the benefit and paid extra premium from the outset
Group IP
- Usually based on salary gross of tax, net pay schemes can be offered
- Continuation options may be offered
- May provide employee and employer state welfare and pension contributions as additional benefits
Incapacity
Unable to earn income as result of illness or accident
(Can be offered to people who work but aren’t paid e.g. housewives or temporarily out of work e.g. unemployed)
Examples of occupational definitions
- Inability to perform own occupation
- Inability to perform own occupation and any other suited occupation by education, status or training
- Inability to perform own occupation for an initial period (e.g. first two years) of claim followed by inability to perform any occupation thereafter
- Inability to perform any occupation
Incapacity definitions can be
- Occupation based
- In terms of inability to perform various tests regardless of occupation
Examples of incapacity test
- FATs- Functional Assessment Tests
- ADLs- Activities of Daily Living
- ADWs - Activities of Daily Work
- PCA - Personal Capability Assessment
Risks to insurer
- Claim inception and termination rates
- Anti-selection
- Selective and normal withdrawals
- To a lesser extent, mortality, expenses and investment
- Capital requirements will normally be low
