6 - Income Protection Flashcards
Nature of income protection policies
Description of standard policy
These are long-term policies which provide regular monthly or weekly income if the insured is unable to work due to long-term illness of incapacity.
Long-term nature so designed to be signed for long periods, not renewed on an annual basis with premiums regularly reassessed.
Standard policy pays out after a fixed period of time (deferred period) until the insured dies, returns to work or the policy expires.
What are these specific types:
- Limited term cover
- “Day one” and “back to day one” cover
- Investment linked
- Unemployment insurance
- Limited term cover - Only get paid income for a limited time (one to five years)
- Day one cover - For the self-employed, pay out from the day you get sick/injured
- Investment-linked - These are rare but offer an investment element
- Unemployment insurance - Some policies can include an unemployment element, but this is usually written as a short term renewable addon.
How is incapacity defined?
As with most things, each insurer has their own definitions.
So different insurers might make a different decision around whether you have an illness or injury that prevents you from working.
You need to consider this when selecting providers.
What is rehabilitation benefit?
What is proportional benefit?
Rehabilitation benefit and proportional benefit are common features of policies to encourage claimants to go back to work.
They effectively top up somebodys income proportionately if they return to work at a lower level of income than they had before. This prevents the situation where they are better off staying sick than going back part time.
Rehabilitation benefit is more for going back part-time in the same job, proportionate is where you can’t do your old job but can do a new job with lower pay.
What is “waiver of premium”?
What are “increase options”?
Waiver of premium is when the insurer says you don’t have to pay your premium while you are claiming the benefit.
Increase options are features of contracts that increase the cover over time (since your income level at work is likely to increase). Can be linked to an inflation index or on a fixed basis. Obviously will cost a bit more.
Limitation of benefit
Limitation of benefit refers to the cap on the amount of income that is paid out.
To ensure you aren’t better off claiming sickness than staying in work the benefit payable will be limited to about 50 to 60% of your actual gross income.
Sometimes statutory sick pay and other state benefits are included in this amount and the insurer tops it up to the 50 to 60% cap.
Claims
If the deferred period is X months, when should you contact the insurer?
What evidence do you need to supply?
You should contact the insurer ASAP in writing to inform them of the illness/injury.
They may ask you for some form of evidence but there is no rule to say you have to provide anything in particular. They might ask you to get a GP letter or something.
What are the common exclusions? (5)
- Alcohol or drug abuse;
- Criminal acts;
- Flying;
- Hazardous sports;
- Living abroad (outside the “free limits” area defined by the policy for over 1 year)
Group Schemes
What are they?
How is the benefit paid if claimed?
Group schemes are when an employer provides income protection (or other insurance) for employees.
A claim would be paid to the employer (since they hold the policy) then the employer passes it on to the employee.
What are the tax implications of the premiums and benefits?
Consider both group schemes and personal schemes.
General rule is that if the premiums paid are tax deductible then tax has to be paid on the benefits.
For personal policies there is no tax deduction it’s just a normal bill, so you don’t get taxed on the benefits.
For group policies the employer will usually get tax deductions on the amount they spend on premiums, so the benefits will have to be taxed when they get paid to the employee (just like your salary).
Advisor issues
Main disadvantage of IP
Appropriateness of IP
The main disadvantage is that underwriting is strict, they look closely at your employment type, so often the people who need it most can’t afford it.
The cap on the benefit is also an issue, you need to be careful not to get too much cover because the 50-60% cap means it will be money for nothing.
Also consider whether critical illness insurance might be more appropriate.
