Ch5: Income Protection

Question 1

The main needs addressed by IP insurance

Answer 1

1) replacement of income when the policyholder is unable to continue in his/her own occupation and cannot earn an income
2) an income stream designed to match the policyholder’s loan servicing cost
3) regular income stream to cover premiums on other insurance
4) Locum Protection insurance

Question 2

Groups who perceive the greatest need for IP

Answer 2

a) employer who is keen to pass on the financial responsibility for sick employees to an insurer after a limited period of invalidity
b) the self-employed person
c) individuals who don’t have provision through their employers

Question 3

Policy conditions should aim to:

Answer 3

• reflect the true intentions of the office
• give some cushion against adverse events over which the office has no control
• be, as far as possible, simple and unambiguous, so as to assist the sales, underwriting and claims process

Question 4

Replacement ratio

Answer 4

Ratio of post-claim income to pre-claim income (both net of taxes)
Reflects the reduction in disposable income after incapacity

Question 5

How can over-insurance occur

Answer 5

• over-insurance from outset
• subsequent over-insurance through salary not keeping up with benefits
• a reduction in the tax levied on IP claims
• multiple policies or receipt of other non-disclosed income

Question 6

How to avoid over-insurance

Answer 6

• an appropriate maximum benefit formula
• quality training of those conducting the sale, reducing the incentive to over-insure
• regular reviews
• clear policy conditions highlighting the likely action at the claims stage in the event of over-insurance

Question 7

Main reasons for having a deferred period:

Answer 7

1. to integrate with employer-supplied benefits
2. to reduce the cost of claims to the insurer
3. to reduce insurer’s admin costs
4. to meet customer’s true needs

Question 8

Occupational definitions

Answer 8

• inability to perform own occupation
• inability to perform own occupation and any other suited occupation by status, education or training
• inability to perform own occupation for an initial period of claim followed by inability to perform any occupation thereafter
• inability to perform any occupation

Question 9

Alternative incapacity criteria

Answer 9

• ADLs
• functional assessment tests (FATs)
• activities of daily working (ADWs)
• personal capability assessment (PCA)

Question 10

Additional IP benefits under group policies

Answer 10

• employee pension contributions
• employer pension contributions
• employer state welfare contributions
• employee state welfare contributions

Question 11

Differences in morbidity rates between offices

Answer 11

• the mix of business by the main rating factors
• the level of benefits / terms and conditions offered
• claim definitions
• strength of initial underwriting
• claims underwriting and subsequent claims management

Question 12

IP confusing issues

Answer 12

• definition of incapacity and the measures of fitness to work are not always open to objective assessment
• payouts are not always linked to current salary
• it may be necessary to apply benefit limits
• underwriting can be complex
• there may be exclusions