Chapter 5 - Income Protection

Question 1

How can over insurance arise in IP insurance? (4)

Answer 1

• over insurance at outset
• subsequent over-insurance, through salary not keeping up with benefits
• reduction in the tax levied on IP claims, applying to existing PH
• multiple policies or receipt of other non-disclosed sources of income while sick

Question 2

Policy conditions should aim to: (3)

Answer 2

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

Question 3

Robust product designs that can attempt to avoid over insurance of IP insurance are: (4)

Answer 3

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

Question 4

4 main reasons for deferred period on IP:

Answer 4

1. Integrate with employer supplied benefits
2. Reduce cost of claims to insurer
3. Reduce insurer’s administration cost
4. Meet true customer needs

Question 5

Different tests to test capabilities for an IP: (4)

Answer 5

1. Activities of daily living
2. Functional assessment tests
3. Activities of daily working
4. Personal capability assessment

Question 6

Tasks used in the definition of ADL: (6)

Answer 6

1. Feeding
2. Dressing
3. Washing
4. Toileting
5. Mobility
6. Transfer

Question 7

Pros and cons of using personal capability assessment for IP policies:

Answer 7

+ it is precisely described, so less disputes than under an occupational based definition
+ it identifies generic skills necessary to be capable of work, so applicable to all occupations
+ claim assessors does not need to familiarise themselvebwoth demands of different occupations
+ it

Question 8

What is a linked claim condition under income protection plans?

Answer 8

The deferred period will not apply if sickness recurs within a short period of returning to work

Question 9

Policyholder needs met by income protection benefits: (5)

Answer 9

1. IP benefits replace part of the income that the insured life would have earned if he becomes unable to work due to an accident or illness
2. This benefit can be used to maintain the standard of living of the insured life on disability as the state of sickness benefit is usually insufficient
3. Benefit may be used to meet monthly loan servicing costs eg mortgage repayments
4. IP benefits may be used to cover premiums on other insurance policies
5. Professional practices may use IP to protect the partnership by replacing the income lost due to incapacity of one of the partners