5: Protection Solutions In The Event Of Illness/disability: CIC And IPI Flashcards
Critical illness Cover - what is it? Income or lump sum?
CIC provides a lump‑sum payment on diagnosis of one of a specified range of life‑threatening or debilitating illnesses or medical conditions
* Life assured can recover
* No need to repay funds if they do not recover
* Not possible to claim multiple times on the same cover
What are the three ‘core’ conditions that the Association of British Insurers (ABI) require all CIC policies cover?
- Cancer – excluding less advanced cases
- Heart attack – of specified severity
- Stroke – resulting in permanent symptoms.
CIC: Total and Permanent disability (TPD)
Some insurers offer payment in the event of total and permanent disability
* Definitions vary between companies:
* Some take it as being a total and permanent disability that prevents the policy holder from doing any job to which they are suited by virtue of status, education, or experience
* Others may be more stricty and stipulate that the disability must prevent the person doing any job at all
What is suitable for replacing lost income due to illness?
Income protection insurance
Critical illness cover can be used, but in most cases IPI is better suited for this need
ASU
Typical uses of critical illness cover (Name 6)
- Provision of long‑term care, either in hospital or at home;
- Alterations to living accommodation
- The purchase of specialised medical equipment, such as a kidney dialysis machine
- Mortgage/debt repayment
- Providing protection of lump sum investments avoiding the need to draw on them in the event of illness.
- Improving the quality of life of a terminally ill person.
Types of CIC plan - Stand-alone plans
- Arranged on a non-profit basis
- Basically term assurance that pays out in the event of a critical illness
- In the event of a claim, the insured must surive a specified period, usually 28 days - otherwise the claim will not be paid
Types of CIC plan - Combined needs (or integrated) Cover
- Combine with term assurance (usually, WOL available) to provide cover in the event of death or critical illness
- Can be arranged on single or joint-life first claim basis
- Paid out on whatever is earlier - death or illness. Policy then ceases
- Less common arrangement, though possible, is a plan that pays out on both.
Combined/integrated cover - considerations/uses
- More expensive than covering death only
- Less expensive than arrange seperate policies to cover death and CI
- Particularly useful for family protection
Use of trusts with CIC policies
Combine/integrated cover where the repayment of a debt upon death, but also to provide funds for the policyholder living through a critical illness is an objective, the use of a split-benefit or carve out trust written on a discretionary basis may be carefully considered. Here:
* Life assurance held in trust for benefit of nominated beneficaries
* CIC is held for the benefit of the insured or their spouse
- Additionally, this can help mitigate IHT issues upon death
- Where the recepient may claim benefits that are means tested, it keeps the funds out of their estate - allowing eligiblity.
Group critical illness cover
- low cost to employer due to averaging of risk that a group policy allows
- Offers a more limited list of insured conditions when compared with an individual policy
- Treated as a benefit in kind - therefore the employee may need to pay incme tax and NICs on the premiums
- Deductable for corporation tax for the employer
Premium structure of critical illness cover - Premiums are based on what two factors? What are guaranteed or reviewable premiums?
- Main factors in underwriting a critical illness plan is the risk of morbidity (illness)
Premiums are based on two key elements
1. The applicant - health, age, lifestyle, etc
2. Assumptions on the firm’s future claims, investment performance, and wider industry trends.
- Policies may be set out on guaranteed or reviewable premiums
- Reviewable premiums are lower at the outset, but are likely to increase as morbidity increases with age. Reviews have every 5 years then annually or stated intervals
How often do reviews of premiums take place for CIC?
- If not guaranteed
- After 5 years, then every year after or stated intervals
- No medical underwriting at review - risk is determined at the start of the policy
Exclusions for CIC
Typical general CIC exclusions
* Being diagnosed with a critical illness outside the policy term.
* Not surviving for a specified period following diagnosis (Usually 28 days)
* Pre-existing conditions are excluded
* If a person with a single policy dies, stand-alone policies will not pay out (some providers give a nominal cash sum in the event of death)
CIC - Additional benefits - Child cover
- Offered from ages 1-3 months to 18, or 22-23 if in full-time education
- If cover a standard part of plan, benefit will be a percentage of parents plan - Up to a maximum of £25,000
- If standalone, subject to additional premiums and choice of sum assured
- A claim on child cover will not affect the parent’s policy
- Claims limit is per child
Income Protection Insurance (IPI) - What is it? what are it’s uses? Compare to ASU? Who is it particularly important for?
Provides a replacement income in the event the policy holder cannot work due to illness, disability, or accident until return to work or retirement
- Insurer cannot cancel cover - this distinguishes it from ASU (which is reviewed annually)
- Although, it is possible to have a reviewable premium structure (reviews typcially take place ever 5 years)
- Can be cancelled if premiums not upheld
- Most providers will provide cover for dependant spouses or partners as it is usually clear that an income would be needed to replace the work this person would do
- Particularly important for self-employed
- Can also be used in a business sense to provide key person cover and partnership protection
Benefit structure for IPI - How is benefit calculated? Cab it be indexed? How long is the benefit paid for? Is it taxed?
- Traditionally organised as a proportion of earnings (50-75%)
- May be organised on a lower maximum percentage but do not take state benefits into account.
- Altnertaviely, 50-60% may be offered on the first band of earnings, but a lower perecentage on higher earnings.
- Can be indexed
- Some providers have minimum and maximum terms
- Paid until recovery, end of policy term, death or retirement, whichever is first
- Benefit is paid tax free for Personal plans
- For employer-provided IPI the benefits are taxable as they are classed as a benefit in kind
Proportionate benefit clause in IPI?
Policy where if a client returns to work but at a lower salary than previously, a proportion of the benefit will be paid.
Income protection insurance - deferred period
- At least 4 weeks, in which no benefits are paid
- ‘(back to) day one’ cover - benefit entitlement commencing
on the first day of illness once the insured has been off work for three days.
Deferment periods - 4 weeks, 13 weeks, 26 weeks, 52 weeks, 102
Types of premium for IPI
level guaranteed
* Premiums stay the same for the life of the policy, unless the life
assured selects indexation or makes a change to their policy.
age-costed guaranteed
* premiums start lower than the guaranteed rates but increase with age.
* The rates that determine premiums from the outset are guaranteed not to change.
age-costed reviewable
* premiums start lower than the guaranteed rates but increase with age. In addition,
* Premiums can be reviewed (and increased) by the insurer during the term of the policy and may therefore exceed the cost of guaranteed premiums.
Two factors that influence the choice of deferred period
An employee’s sick pay benefits
* If an employer pays full salary for 6 months, the sensible choice would to defer until this date
* If half pay after 6 months, half benefit can be organised.
Cost
* The longer the deferred period the lower the premium
Group Income protection
- Employer can cover the individuals maximum benefit, NICs and Pension contributions
- Allowable business expense
- Group cover does not require underwriting and is known as free cover
- Benefits received by the employee are taxable as income.
Main differences between IPI and CIC - Payment structure, aims, claims?
- CIC pays a lump sum
- ICI pays an income
- CIC aimed at rebt repayment and extra costs with illness
- IPI aimed at replacing lost income
- CIC can be triggered even if the claimant takes no time off work, for IPI they must be unable to work
- CIC is a single sum
- IPI pays until they return to work, can be till retirement age
- CIC ceases when a claim has been made
- IPI keeps running as long as premiums are paid, meaning that multiple claims can be made in the event of sucessive illnesses
Waiver of premium - what is it? How much extra is it?
WoP is designed to ensure that policy payments are maintained and benefits preserved if the insured is unable to work owing to accident, illness or disability.
* Usually adds 4-6% to premiums
What is the survival period (waiting period) and how long is it?
What plans does it usually apply to?
The survival period or waiting period is the time in which the policy holder must survive for benefit to be paid out. Commonly related to CIC plans
* 28 days
The **minimum **deferred period for an income protection insurance (IPI) and a payment protection insurance (PPI):
- IPI - 4 weeks
- PPI - 30 days
What is an endowment?
An endowment is a regular-premiun investment-oriented life assurance contract designed to pay a capital sum on a pre-determined maturity date; it will pay a specified death benefit, the sum assured, if the policy holder dies before the maturity date.
- Combines life cover with a savings element
- Usually has lower charges relatie to protection policies
- Mainly used to target savings.
- The life asussrance component means the saving target is made even if the policy holder dies
Endowments are now no longer sold.
What is the typical maximum benefit available for an IPI policy?
50-70% of gross income
