5 - Income Protection Flashcards
Overview
Income protection policies
Define, Insured event, added features, premiums and benefits, SV
Define:
- Aim is to replcae part of income that would have been earned when the policyholder is unable to work due to incapacity as result of illness or accident
Insured event:
- incapacity = inability to work
- policy document will need to clearly define the circumstances that need to exist for benefit to become payable
- policy document needs to clearly define circumstances under which payment will cease
- excluded circumstances: unemployment, redundancy, reluctance to return to work, HIV, attempted suicide
Benefit:
- regular income until recovery, death or end of annuity term
- regular income may be commutable to provide a lump sum (not generally the case)
- can be fixed or increasing
- multiple periods of benefit payments allowed, without policy ceasing
Premiums:
- based on benefit design (WP, BP) and rating factors
- level or increasing, ceases in periods of benefit payment
SV:
- No surrender value
- Because sum at risk is very large
- once expenses and expected claims are taken into account, little reserve left to build up much of an asset share
What is permanent about PHI?
- insurer needs to continue payment as long as claim conditions are satisfied
- As long as policy conditions are met, insurer cannot cancel policy
- policy is written in guaranteed terms = benefits and premiums are fixed
IP insurance
Main needs addressed
Replacement income when p/h is unable to continue in his/her own/any occupation, and cannot earn an income
- Individual with dependants needs comfort of knowing there will be an income stream into the long term to provide for unkeep and welfare when unable to work, or take a lower paid job, due to ill health
- State sickness or disability allowance are often insufficient
- employee benefits are usually only short term, meaning employees earning a salary will usually opt for products with a longer deferred period and opt for any occupation
- self-employeed will need shorter or no deferred period and opt for own occupation
Income stream to match the p/h’s monthly loan servicing costs
- comfort that insurance will provide protection against the inability to meet major financial commitments
- e.g. mortgage payment protection insurance
- mny lenders may have this insurance as an requirement
- benefit will cover both interest and capital repayments
IP insurance
Other needs addressed
Regular income stream to cover other premiums
- Usually covered by a premium waiver benefit on other contracts
- Standalone covers are rare, except for substantial pension contribution covers
Locum protection insurance
- small professional practices
- partners are heavily reliant on each other to provide full service to clients
- loss of a partner could have serious impact on income stream
- benefit will cover the salary and other employment costs of a temporary replacement professional
- short defferred period applicable
Employers who want to pass the responsibility for sick employees to an insurer (Group IP)
- there may be legal requirements
Self-employeed individuals who cannot rely on employer-sponsored scheme
Individuals who do not have provision through their employer
IP insurance
Needs perceived by customers
- ill-health is unknown territory and caused much concers
- individuals (esp with dependants) will want to minimise the risk that a breakdown in healthcare will disrupt their financial well-being
- disability and sickness are unpredictable and costs are unknown
- many value the insurers’ willingness to protect income in these circumstances
- the psychological effect of knwoing you’re protected against financial consequences of ill-health, definitely fulfils a p/h need
IP insurance
Simplicity vs Complexity
- IP concept is simple and appealing
- But T’s and C’s are complex
- since there is not an easily objective way of determining whether an individual is able to perform their own/any occupation
IP insurance
Benefit definitions - amount
Replacement ratios
- ratio of post-claim income to pre-claim income (net of tax)
- critical indicator of likely claims experience
- the higher the ratio, the lower the incentive to return to work and the worse morbidity experience would be
Over-insurance
- Higher than appropriate replacement ration
- arises at outset, though alary not keeping up with benefits, reduction in tax levied on IP claims, multiple policies or undisclosed income
- robust product design will attempt to avoid over-insurance
- addressed by:
- appropriate maximum benefit formula at point of sale
- quality training of sales people
- regular benefit reviews
- clear policy conditions highlighting actions to be taken at claim stage in the event of over-insurance
Escalating benefits and premiums
- Benefit can remain level, increase at fixed rate, or increase in line with index
- same escalation in and out of claim (premiums will usually also escalate then)
- different escalation in and out of claim
- escalation out of claim, level in claim or vise versa
- escalation rates should not exceed expected earnings inflation
- protection against adverse experience: premiums increases are based on the current premium rate for additional benefit unsing the age at the time of increase
Proportionate benefits
- rehabilitation or proportional benefit to those who return to work on a part-time basis or less strenuous and lower paid role
- reduced benefit relates to ratio that earnings from new rol bear to those from occupation at start of claim
Waiver of premium
- premiums are waived during periods when benefits are payable
Over-insurance
- What does it mean ito IP
- How to check for it
- for what type of p/h are these checks difficult in practice?
- at claims tage, policy benefit is greater than proportion of salary appropriate to maintain an incentive to return to work
- financial underwriting (at outset and claim stage) questions and supporting docs
- self-employed, or irregular income. income sources may include dividend and salary (can use tax assessments or certificates from accountants)
IP Insurance
Benefit definitions (timing)
Waiting period
- period following commencement during which benefits will not be paid
- protects against anti-selection
- however, very uncommon - initial underwriting is more effective
Deferred period
Insurer will not pay benefits within the first few weeks of sickness, because:
- integrate with emloyer-supplied benefits
- reduce cost of claims - therefore premium
- reduce admin costs - therefore premium
- meet customer needs
- split deferred policy: $250 per week aftr 13 weeks and $500 pw after 26 weeks
Linked-claims period
- waive deffered period if sickness recurs within 26/52 weeks
- to encourage return to work
- otherwise may tend to delay returning to work to ensure full recovery and avoid another deferred period
Benefit period
- expiry age or term
- when benefit ceases
- usually normal retirement age (others: 50,55,60,65)
- minimum: 5 years
- in case of expiry age - premiums will be paid for exact number of years, since no one pay premiums close to expiry age (governed by deferred period)
IP insurance
Two types of claim definitions
- Occupational definitions
- alternative incapacity criteria
IP insurance -Two types of claim definitions
Occupation definitions
Effect on price charged and claim payments
The effect of occupation on th eprice charged
- IP rates are dependent on occupation
- higher loading applied to higher risk occupations
- loadings are determined based on claims experience
- Some occupations (doctors and dentists) may have entirely separate rates
The effect of occupation on the claim payment
occupational claim defintions
- own occupations
- reasonable occupatio (own and any other suited ocupation by education status or training)
- own occupation for initial period then any occupation thereafter
- any occupation
IP insurance -Two types of claim definitions
Alternative incapacity defnitions
Why?
- occupational claims are unsuitable for those not paid in employment - house persons and the unemployed
- claim events are defined in terms of an inability to perform various tests, regardless of occupation
Examples:
- ADLs
- Functional assessment tests (FATs)
- ADWs
- Personal capability assessment (PCA)
Which two factors generally force certain occuaption to only take out any occupation IP insurances
- occupations which require a certain skill and those skills could easily be impaired by a minor disability.
- occupations which require complete recovery before being able to return to work. This would increase the eriod of disablement
ADLs
ADLs definitions asses the p/h ability to perform a number of normal everyday tasks, incl.:
- feeding
- dressing
- washing
- toileting
- mobility
- transfer
requirement for benfit payment is the failure to be able to undertake, unaided, a given number of ADLs
PCA tests
- Definition
- adv and disadv to the insurer
Personal Capability Assessments
Example: Benefit is payable if p/h was in a full time occupation before incapacity and now due to incapacity:
- unable to perform at least (three) of the defined personal capabilities or
- suffer one the defined serious illnesses
Advantages:
- tests are precisely described
- fewer disputes
- identifies generic skills necessary to be capable of work, and so are applicable to all occupations
- unlikely to result in windfall claims, since test imply a measured level of incapacity
Disadvantages:
- some may be unable to find gainful employement, but do not satify the nacessary PCA tests to qualify for claim = bad publicity
- potential policyholder may see tests as irrelevant to the risks they face
