Ch 5: Income protection insurance Flashcards
Discuss the customer needs met by income protection products
Main needs (8)
Perceived needs (5)
Other needs (3)
Other general needs (5)
-
Main needs
- Income replacement
- peace of mind (income stream while unable to earn)
- if state sickness/disability income insufficient
- employment benefits short term (employer continues to pay employee’s income)
- Match loan servicing costs
- protection against inability to meet major financial loans
- required by lender
- may cover unemployment
- Income replacement
-
Percieved needs
- protect ill-health uncertainty
- minimise risk of disruption to financial wellbeing esp with dependants
- treatment bills unknown (disability/sickness often unknown)
- value financial comfort
-
Other needs
- fund other insurance prems
- premium waiver
- IP on professionals in practice
-
Other general needs
-
clear purpose
- in risks covered/benefits payable
- easily understood, with unclear interpretations in clear favour of claimant
- appropriate charging structure e.g. addition of options/guarantees
- reasonable premiums
-
clear purpose
List the key features of an IP contract
(8 main points, 11 subpoints)
-
Replaces income
- would’ve earned if becomes unable to work due to accident/illness
- from temporary annuity continuing until insured recovers/dies/annuity term ends, whichever comes first
- May be commutable (to provide lump sum/ not generally the case)
-
Circumstances clearly defined for benefits to become payable/cease
- Not covered
- unemployment, redundancy, early retirement, reluctance to return to work, some illnesses/physical injury e.g. HIV, attempted suicide
- Not covered
-
Benefits do not cease on claim
- cover still provided if recover and return to work
-
Level/increasing premiums/benefits
- may be at fixed rate relative to sum assured
- No surrender/maturity value
- sum at risk is very large compared to regular premium.
- once expenses/expected claims taken into account, little surplus left to build asset share
- Own/similar occupations
-
With profits/unit linked
- mostly without profits basis, no benefit paid if claim is not made
- bonus builds up death/expiry benefit, so bonus doesn’t affect IP claims
- unit linked policies may have a morbidity charge deducted from fund, wiith remaining unit fund at end of policy term paid as maturity benefit
What are some key requirements regarding policy conditions on IP contracts?
(3 kay points, 6 subpoints)
- Must reflect true intentions of product
- Some cushion over events for which insurer has no control
-
Simple and unambiguous
- ensures important risks transferred to insurer
- clear what info required
- accurate underwriting
- rapid underwriting process
- ensure low claim rejections
- reduce non qualifying claims
What kind of product variations are possible on IP contracts in terms of guarantees/reviewability of premiums?
- Guaranteed/renewable premium rates
-
full guarantee for full term of policy, expressed as level increasing/increasing according to specific index
- requires substantial loadings (very long contracts, maybe high standard error for claims experience)
- higher reserves
-
no guarantee
- annual review
- comfort knowing premiums can be adjusted due to bad experience
- difficult at outset
- risks change
- sickness that would’ve caused death, can now impair lives, leading to claims
- terminal illnesses no longer terminal
- market pressures may limit premium increases
- selective lapsing, leading to portfolio with only poor lives left
- PRE: careful not to create expectations of no increases
- maximum increases
- uncertain future premium amounts
- risks change
-
some guarantee
- e.g guaranteed for first five years, with complete freedom review after
-
full guarantee for full term of policy, expressed as level increasing/increasing according to specific index
- Guaranteed insurability
- No claims discount
What options may we find with respect to benefits/premiums on IP contracts in terms of escalation? (8)
- May be subject to a cap
- Index or fixed rate
- escalation rate < earnings inflation
- difficult to match too high escalation rate
- Escalation rates might be different in and out of claim (can lead to complex product design)
- Premiums increase
- same rate as benefit (premium assumptions prevailing when original contract effected)
- required for additional cover at given age (protect against advers exper)
What are some important points to bear in mind when setting claims definitions for IP contracts? (4)
-
Claim definitions
- need to strike a balance btwn meeting needs/controlling insurance risk
- can be difficult to assess incapacity, ADLs are objective
- should be allowance for interpretation
- price charged for contract may differ for different risks represented
What kind of claims definitions do we have for IP contracts?
(1,6)
(1,7)
-
Occupational based
- inability to perform own occupation (very expensive/greatest level of cover)
- inability to perform own/reasonable occupation
- by education, status, training
- own occupation initially thereafter
- inability to perform any occupation
- offered where occupations carry above average accident/health risk
- Alternative incapacity criteria
- assessing impact of illness on insured’es ability to perform tasks required by an occupation or day-to-day life
- activities of daily living
- physical activity (feeding, dressing, washing, toileting, mobility, transfer)
- mental capacity (overides tests of physical incapacity
- functional assessment tests
- activities of daily working
- personal capability assessment
- activities of daily living
What kind of benefit definitions might exist for IP contracts?
(5 points, 16 subpoints)
1 other important overall point
-
Replacement ratio (level of post-claim income to pre-claim income, net of taxes in both cases)
- easy to calculate
- tax impacts ratio (some regions do/don’t tax benefits)
- level indicates claim experience
- higher/lower => might dissentivise/incentivise return to work
- limits
- ensure individuals have incentive to return to work
-
Maximum benefit specified
- in terms of salary at claim time
- in terms of state benefits
- Benefits expressed as cash amount (requires annual review to check needs met)
- Benefits in form of premium waivers
- waived when benefits are payable
- charged for by a small percentage addition to premium rate
-
Proportionate/rehabilitation benefits
- for those returning to work on part time basis/less strenuous/lower paid role
- benefits both insured/insurer
- recuperation needs (attractive to policyholders, doesn’t add sign cost)
- benefit relates to ratio (that gross earnings from new role bear to those from occupation against which disability was being claimed
- Benefit definitions mustn’t disentivise insured returning to work
What is over-insurance in the context of IP contracts (1), and how might it arise? (5)
- When benefit is more than is needed e.g. a higher than appropriate replacement ratio
- Arises
- from outset
- subsequent to sale (salary not keeping up if benefits increase automatically on policy anniversary)
- reduction in tax on IP claims
- multiple policies
- non-disclosed income
How do we address over insurance in the context of IP contracts? (5)
- Addressed
- appropriate maximum benefit
- max replacement ratio
- stringent limitations for salaries in excess of limits
- overall max benefit level
- deductions for other benefits
- review benefit level appropriateness
- clear policy conditions
- claim stage
- financial underwriting
- appropriate maximum benefit
Other policy definitions on IP contracts:
- Waiting period (3)
*
- Watiing period
- specified period after policy start during which benefits won’t be paid
- may also apply to additional cover sought
- reduce potential for anti-selection
Other policy definitions on IP contracts:
- Deffered period definition and characteristics (3)
- Deffered period benefits (5)
- Deffered period
- period of incapacity/sickness during which insured won’t pay benefits
- split deferred period: eg pay half over for certain amount of weeks, full amount after
- early notification (even before deferred period end so insurer can help with rehabilitation)
- Deferred period benefits
- integrate with employer-supplied benefits
- reduce claim cost
- reduce administration cost
- reduce number of trivial claims
- meet customer needs: eg won’t want to claim for few days off for flue!
Other policy definitions on IP contracts:
- Linked claims period (2)
*
- Linked claims period
- waive deferred period if same sickness recurs within certain amoutn e.g. 26, or 52 weeks
- encourage work return
Other policy definitions on IP contracts:
- Expiry age/term (3)
*
- Expiry age/term
- age at which benefits cease; often same as normal retirement age
- exact duration
- shorter premium paying period
Briefly discuss group IP contracts
General (8)
- General
- legal obligation eg some countries sick pay during first 2 weeks if sick
- discretionary benefits (after statutory period, together with illhealth income)
- may be just administration
- tax advantages
- cheaper (economies of scale)
- smooth early retirement (when employee continuing in poor health)
- cover employer’s statutory sick pay payments
- promote health (and ensure speedy return to work following operation)