Chapter 5: Health and Care insurance products - Income protection

Question 1

Income Protection (IP)

Answer 1

Income protection is a long-term insurance contract that provides the insured with regular, short- or long-term payments during periods of incapacity in return for regular premiums.

Question 2

The concept of IP is simple and appealing, but, there are certain issues: (5)

Answer 2

1. the definition of incapacity and the measures of fitness to work are not always open to objective assessment.
2. payouts are not always linked to current salary.
3. it may be necessary to apply benefit limits
4. underwriting can be complex (due to occupation or past medical history)
5. there may be exclusions

Question 3

The premiums can: (3)

Answer 3

1. be waived during periods when benefits are payable
2. be subject to increase in line with any regular increase in benefits
3. be guaranteed throughout the term of the policy or reviewable by the insurer at regular intervals specified in the policy.

Question 4

Replacement ratio

Answer 4

the replacement ratio is usually defined as the ratio of post-claim income to pre-claim income, in both cases net of income taxes.

Question 5

Benefit features - The benefits (for IP) can: (7)

Answer 5

1. increase at a specified rate from the start of the policy.
2. increase at a specified rate during any period for which benefits are payable.
3. be paid at a reduced rate if the insured returns to work part time or works in a less well-paid job than before becoming unable to work.
4. be available for a fixed term or up to a specified age, usually the insured’s normal retirement age
5. be subject to a deferred period at the start of each period of incapacity during which no benefits are payable.
6. be subject to a linked-claim period so that periods of incapacity separated by less than the linked-claim period are treated as if they were one continuous period of incapacity
7. be increased without further evidence of health if a “life event” specified in the policy occurs and the policyholder has opted for this benefit and paid an extra premium from outset.

Question 6

Examples of occupational definitions (incapacity): (4)

Answer 6

1. inability to perform own occupation
2. inability to perform own occupation and any other suited occupation by education, status or training.
3. inability to perform own occupation for an initial period of claim followed by inability to perform any occupation thereafter.
4. inability to perform any occupation.

Question 7

Example tests for an alternative to an “occupational definition” (4):

Answer 7

1. functional assessment tests (FATs)
2. activities of daily living (ADLs)
3. activities of daily working (ADWs)
4. personal capability assessment (PCA)

Question 8

IP products include the following risks to insurer:

Answer 8

1. claim inception and termination rates, including anti-selection
2. selective and normal withdrawals
3. to a lesser extent, mortality, expenses and investment
4. capital requirements will be low

Question 9

The primary interest of customers: (4)

Answer 9

1. Products that meet their needs.
2. Products that are clear in purpose.
3. Products that have appropriate guarantees and options.
4. Products that are affordable.

Question 10

Define Incapacity

Answer 10

Incapacity means being unable to earn an income as the result of illness or accident.