Ch 5: Income protection insurance Flashcards
1
Q
Discuss the customer needs met by income protection products
Main needs (8)
Perceived needs (5)
Other needs (3)
Other general needs (5)
A
-
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
-
Perceived needs
- protect ill-health uncertainty
- minimise risk of disruption to financial wellbeing esp with dependents
- treatment bills unknown (disability/sickness often unknown)
- value financial comfort
-
Other needs
- fund other insurance premiums
- 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
2
Q
List the key features of an IP contract
(8 main points, 11 subpoints)
A
-
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, with remaining unit fund at end of policy term paid as maturity benefit
3
Q
What are some key requirements regarding policy conditions on IP contracts?
(3 key points, 6 subpoints)
A
- 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
4
Q
What kind of product variations are possible on IP contracts?
A
- Guaranteed/renewable premium rates
-
full guarantee for full term of policy, expressed as level increasing/increasing according to specific index
Disadvantages of Guaranteed Premiums:- requires substantial loadings (very long contracts, maybe high standard error for claims experience)
- higher reserves
-
no guarantee
Advantages of Reviewable Premiums:- annual review
- comfort knowing premiums can be adjusted due to bad experience
- changes in workplace
- difficult at outset
- changes in diseases and medical advancements change the associated risks
- sickness that would’ve caused death, can now impair lives, leading to claims
- terminal illnesses no longer terminal
- changes in diseases and medical advancements change the associated risks
-
full guarantee for full term of policy, expressed as level increasing/increasing according to specific index
- Disadvantages of Reviewable Premiums
* 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-
some guarantee
- e.g guaranteed for first five years, with complete freedom review after
-
some guarantee
- Guaranteed insurability option - the policyholder is able to increases the sum assured at the offices standard rates when a particular life event occurs, without supplying further medical evidence
- No claims discount - a discounted premium if no IP claim has been made
5
Q
What options may we find with respect to benefits/premiums on IP contracts in terms of escalation? (8)
A
- 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 adverse experience)
6
Q
What are some important points to bear in mind when setting claims definitions for IP contracts? (4)
A
-
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
7
Q
What kind of claims definitions do we have for IP contracts?
(1,6)
(1,7)
A
-
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 (overrides tests of physical incapacity
- functional assessment tests
- activities of daily working
- personal capability assessment
- activities of daily living
8
Q
What kind of benefit definitions might exist for IP contracts?
(5 points, 16 subpoints)
1 other important overall point
A
-
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 disincentivise insured returning to work
9
Q
What is over-insurance in the context of IP contracts (1), and how might it arise? (5)
A
- 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
10
Q
How do we address over insurance in the context of IP contracts? (5)
A
- Addressed
- appropriate maximum benefit
- max replacement ratio
- stringent limitations for salaries in excess of limits
- overall max benefit level
- deductions for other benefits
- regular reviews to ensure that the level of benefit remains appropriate
- clear policy conditions highlighting likely action at claims stage
- financial underwriting
- appropriate maximum benefit
11
Q
Other policy definitions on IP contracts:
- Waiting period (3)
*
A
- 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
12
Q
Other policy definitions on IP contracts in terms of timing:
- Deferred period definition and characteristics (3)
- Deferred period benefits (5)
A
- Deferred period
- at the start of each period of incapacity/sickness during which insurer 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 –> reduces premiums
- reduce administration cost
- reduce number of trivial claims
- meet customer needs: eg won’t want to claim for few days off for flu!
13
Q
Other policy definitions on IP contracts in terms of timing:
Linked claims period (2)
A
- Linked claims period
- to waive deferred period if the same sickness recurs within certain amount of time e.g. 26, or 52 weeks
- encourage work return
14
Q
Other policy definitions on IP contracts in terms of timing:
- Expiry age/term (3)
A
- Expiry age/term
- age at which benefits cease; often same as normal retirement age
- exact duration
- shorter premium paying period
15
Q
Briefly discuss group IP contracts
General (8)
A
- General
- legal obligation eg some countries sick pay during first 2 weeks if sick
- discretionary benefits (after statutory period, together with illhealth income)
- employer may just administer the scheme
- net pay schemes are offered sometimes (claimant can receive up to 90% of net pre-disability income)
- cheaper (economies of scale)
- continuation option for employees after they leave
- cover employer’s statutory sick pay payments
- promote health (and ensure speedy return to work following operation)
