Chapter 6 - (6 exam questions) - Income Protection Insurance Flashcards
What is IPI and how does it work?
What is the deferred period in relation to IPI
Why is this type of insurance such high risk for insurers?
IPI is an insurance policy that is designed to cover long-term sickness.
It pays a weekly or monthly benefit to replace income where an individual is unable to work due to accident, sickness, or disability. IPI can also provide cover for a homemaker
It pays between 50-75% of income to encourage the assured to return to work
Income from IPI starts to be paid once a ‘set period’ has finished, known as a deferred period.
Self employed people will have a lower deferred period, but this is more expensive
It can be payable up until retirement so it can be a huge risk for an insurer
As an example, if Darren has a IPI for £30,000, and made a valid claim this year, he could potentially receive income for the next 40 years, with a total pay-out of £1,320,000.
IPI is also known as ‘Permanent Health Insurance’ (PHI). What does this mean?
It is known as PHI because if premiums are maintained by the policyholder, the plan cannot be cancelled by the provider, regardless of how many claims the individual makes. IE unlimited claims can be made
It is a pure protection policy. Therefore, it comes under rules contained in the Insurance: Conduct of Business Sourcebook (ICOBS) rather than COBS (which is for investment linked insurance). It can sometimes be investment linked tho because there are unit linked IPI ( these come under COBS )
There are number of different types of IPI on the market. What are they:
(I have add some info below to make it easier to remember)
Standard
Limited term
(Lasts for 2-5 years)
Day one
(Designed for self employed. Benefits paid straight away. Benefits paid weekly to help claimant with cashflow)
‘Back to day one’
(Same as ‘day one’ but there is a short deferral period. After end of deferral period, if still ill, benefits will be backdated to the initial claim day. Slightly cheaper alternative to day one)
Unit linked
(An investment value can build up. An example of this a ‘holloway policy’ issued by friendly societies
Renewable
Basically same as limited term except it lasts for 5 years and has guaranteed renewal (without further underwriting) at end of term
Employer sponsored
The different types of IPI on the market are as follows:
Standard
Limited term
Day one
Back to day one
Unit linked
Renewable
Employer sponsored
SEE BOTH IMAGES for details
IPI in context
Summary of IPI
What are the various features that can be included in an IPI policy
What is a deferred period?
How does it work with IPI?
The period of time between the start of the IPI claim and when the benefit starts to be paid.
The longer the deferred period, the cheaper premiums are (longer = less risk for the insurer)
There is usually a choice of deferred periods in terms of number of weeks. This may be 4, 8, 13, 26, 52 or 104 weeks
NOTE: day one policies, which are designed for the self employed, have no deferred period.
What is waiver of premium?
What is it also known as?
Waiver of premium is insuring your premium against illness or sickness, and thereby maintaining your IPI cover.
It can also be known as waiver of contribution (WOC).
If the individual is claiming due to illness, sickness or disability, the insurer will waive their premium after an initial period, usually the first 6 months, in exchange for a small increase to overall premiums. Charges for WOP vary but could be around an extra 2-5% on top of the standard premium.
Can IPI have an Increasing cover benefit, considering it is capped to a certain level in the first place?
Remember: The caps are: 50% to 60% of lost income for private policies or 75% of lost income for employer-sponsored plans
Yes, benefits are capped to ensure there is an incentive for the individual to return to work once they recover. Annual increases CANNOT exceed this cap and should not be applied if there is any danger of this occurring but if the benefit they receive is well below the cap they are fine to add this as part of the policy
The amount of annual increase applied can be linked to a measure such as RPI or CPI, or it can be a fixed annual amount such as 5%.
for understanding, increasing cover benefit allows an increase in benefit without further underwriting. Premiums will obvs increase tho
What is special events increases benefit in relation to IPI?
This is where the benefit level on an IPI policy can be increased if a certain event has occurred with no underwriting required.
Again benefit levels cannot exceed the IPI cap
The specified events are:
marriage
birth of a child
moving to a new house which leads to a mortgage increase
changing jobs with an increase in salary
Rehabilitation and proportionate benefit of IPI?
For IPI usually, if an individual returns to work, any benefit would cease to be paid.
Sometimes, however, the individual cannot go back to the same job full-time due to the illness they have suffered, or they may need to return to a less-stressful and lower-paid role.
Rehabilitation and proportionate benefit are designed to cater for these situations.
In such cases, a part of their benefit will still be paid, to bridge the gap between their new, lower, salary level and the benefit they are entitled to under the policy.
Rehabilitation and proportionate benefit are variations on this same theme:
Rehabilitation benefit: returning to the same work part-time (Remember this by the fact that the individual is being ‘rehabilitated’ back into their old job but part-time)
Proportionate benefit: going back to a different job with a lower salary
SUMMARY OF IPI
IPI undergoes one of the most rigorous underwriting processes of all financial protection policies.
True or false?
True
It is because There is potentially longest claim period, more chance to claim and Individual does not have to be seriously ill to claim so again more chance of claim. This all means higher risk to the insurer
Does gender effect premiums?
No not anymore
Underwriters will usually look at an applicant’s physical and moral hazards.
What are these?
A physical hazard is something that is unique to the individual - high-risk job or they do high risk activities
A moral hazard - where someone deliberately over insures themselves or takes out insurance with knowledge that they are ill. This is a factor to do with integrity and honesty of an individual.
An IPI pays out is if they claimant is deemed to be ‘incapacitated’ meaning they cannot continue to work as they did before.
There are 4 definitions of incapacity.
Only one can be applied to the IPI policy and this is up to the underwriter to decide what they think is most suitable. They do this by reviewing the persons application and any relevant health screenings etc. What are the definitions?
There is one definition that also applies to homemakers
Can definitions be switched during the term of the policy?
See image
Own - pays out only when they can’t do own job (least stringent, most expensive as its easier to claim)
Any - Pays out only when they cant do any job (most stringent, least expensive)
Suited - Pays out only when they cant do own job or a suited job
Activities of daily living - for homemakers, pays out when they cant do a set number of normal tasks
NOTE: In certain cases, an individual can start with one definition and then switch to another during the policy. A good example of this is a senior manager who starts off with an ‘own’ definition of incapacity.
She is then made redundant and spends the next two years looking for another job.
She is therefore allocated an ADLs definition for this two-year period.
There are 4 occupational classes of risk. Go through each
Class 1 occupation= lowest risk
Class 4 occupation= highest risk
QUESTION
To understand this question you must know the 4 definitions of incapacity and about the 4 classes of occupational risk ratings
What are the 2 premium choices of IPI?
Guaranteed
Premiums remain the same throughout the life of the IPI policy but are higher from the start.
Reviewable
Premiums are lower to start off with but, after the first policy review 5-10 years later, are likely to increase to maintain the same benefit level. If this is unaffordable, the individual may decrease the level of benefit payable.
So, an underwriter assesses the risks associated with an IPI application, and decides on both a definition of incapacity and an occupation class. What happens in the next step?
They have several options open to them in relation to issuing the policy and deciding on the amount of premium that should be charged. These include: SEE IMAGE
This is the same as other insurance policies
All IPI policies will have standard exclusions, where benefits will not be paid out to the insured. These exclusions are there mainly to protect the insurer against claims from self-inflicted conditions.
What are they?
An individual needs to claim against their IPI policy. What happens next?
The individual should notify their insurer, in writing, as soon as they become ill, so that the illness is registered, and the clock starts ticking on their deferred period. Their deferred period will only start once they notify the insurer
insurer will likely request medical evidence and evidence of earnings
Once the insurer is satisfied, and the deferred period has come to an end, the claim will be paid and will continue until the earlier of a return to work, death of the individual, end of the policy, or retirement.
For longer claims, periodic medical evidence is likely to be required on an ongoing basis.
To be able to the claim the individual must be living within their ‘free limits
What does this mean?
It means that to be able to make a claim, the individual must be living in one of certain countries.
The ‘free limits’ vary between insurers but generally include:
The UK and Republic of Ireland
The EU
Western European countries
The USA, Canada, Australia and New Zealand (think of Commonwealth countries)
NOTE: An insurer will pay a claim if foreign residence is temporarily outside the free limits for a maximum of three to six months. If residence outside free limits is likely to be for more than a year, the IPI will be cancelled.
In relation to Employer-sponsored IPI policies when a claim is made what happens and how is it taxed?
For group IPI policies, upon claim, the insurer pays the employer, who then pays the employee through PAYE (the same as how salary is paid). Because it is paid through PAYE, the benefits are subject to income tax and NICs. (key part) .
For group IPI employer premiums are not treated as a benefit in kind for employees so are tax free
To sum up: Premiums are tax free. Claims are not. (Opposite to most other group policies)
Questions
SUMMARY OF underwriting and claims process of IPI
NOTE: Self employed people have to either go with a ‘day one policy’ or a policy that has a 4 week deferral period as a minimum (4 weeks is the shortest deferral period other than day one policies)
