Chapter 6 - Income Protection Flashcards
Level of IP needed depends on - exp, permitted and estimate
benefit limited to what, max ages and insurer cancellation
The level of IP needed depends on;
- individuals essential expenditure e.g. mortgage costs
- maximum permitted level of cover allowed by the insurer
- estimated level of expenditure while incapacitated - other income (divs etc)
Benefit limited to specified percentage of pre-claim income - 50-60% for individual policies & 75% for group policies. Max age usually set at SPA or can have lower cease age with lower premium.
Insurer cannot cancel policy regardless of how many claims are made.
Limited term cover - timeframe, cost, still incapacitated post term, strict
Day one cover - designed for, pays out when and how often +why, price
Back to day one - what is it and price
Investment linked policies - Holloway policies
Unemployment insurance - written how, underwritten, terms and conditions state what (change and stop) and defer
LTC - only lasts between 1-5 years, lower cost, if still incapacitated will stop paying or will pay lump sum and stricter definition may apply.
Day one - designed for self-employed, pay out from day one of sickness, pay out weekly to help cashflow, expensive but high benefit.
Back to day one - benefit not paid until specified period has passed but then backdated to when first fell ill, slightly cheaper than above.
Investment linked policies - Holloway policies can build up cash value paid at retirement.
Unemployment insurance - added in addition to IP, usually written as renewable policy, underwritten by separate policy, terms and conds can be changed at next renewal date, can discontinue cover at any time and some have deferred period
Definition of incapacity - own, suited and any occupation - what are they and switching
Own occupation -unable to perform occupation or any other (most used)
Suited occ - totally unable to work in occ suited re education, training or experience.
Any occ - unable to follow any occ whatsoever
Some policies can switch definition and therefore these have lower premiums than if stick to same throughout.
Rehabilitation benefit - what is it
Proportionate benefit - what is it
Increase options - how can it increase (3), earnings, declining increase and withdrawing
Rehab - Feature of most IP contracts and tops up earnings if returning to work but not on a full pay basis. Encourages sick to go back to work as will not lose ben.
Proportionate - recover but cannot return to same job (due to stress etc) and therefore may have to get lower paid job. Tops up earnings to encourage to go back to work. Top up based on earnings six moths to a year prior to incapacity.
Increase options - can increase with CPI or RPI or predetermined rate or life events, increase may not be able to be supported by earnings, can decline this but insurer reserves right to withdraw increase facility (if two declined in a row)
Non-financial and financial benefits - can provide help such as;
- rehab, psy, disable and defer
Add financial bens - payment
WOP - costed how and rates depend on
Insurers can provide practical helps as well as money such as;
- work with employee/er to set up rehab programme
- offer CBT & counselling
- adapting to workplace disability
- engage with employee/er during defer prior to bens being payable
Additional financial benefits - insurer may provide discretionary payment to help return to work.
WOP;
- costed in similar way but often higher with IP and rates depend on age & occ
- most incorporate WOP automatically.
Limitation of benefit - limit and %, sick pay, large policies and limit, drop in payout, state, UC & IP, if no earnings, budget policies and employer cover taxation
- limit operates regardless of benefit amount
- some insurers add sick pay onto definition of total IP bens
- large policies may have cover reduced to 25-35%
- insured level may actually drop based on their earnings (due to paying out %)
- policies can deduct state disability benefits
- lack of clarity around UC & IP
- if low or no earnings, can pay out a level of benefit, usually £15k
- some budget policies only cover liabilities so may not provide adequate cover.
- benefit level higher if paid to employer to cover tax and NICs
Premiums and underwriting - IP has more questions on what compared to, what rates and false claims.
Hazards - what are they and two types explained
Occupation rates - each class
IP has more questions about health, occupation and income + hazardous sports are more relevant compared to life policies. In setting premium, underwriter looks at morbidity rates. More susceptible to false claims.
Hazards are any action, condition, situation or circumstance that increase risk of claim and there are two types;
- Physical - covers aspects of job and personal life
- Moral - deliberate attempt to over insure
Occupation rates;
- Class 1 - office based
- Class 2 - retail and light manual workers
- Class 3 - skilled workers in non-hazardous manual jobs
- Class 4 - hazardous jobs - higher the class rating, the higher the premium
Claims - deferred period and evidence, pays out until when, medical certs, not recover and reoccurrence
- Deferred period begins once insurer notified and as they approach the end of this, this may request medical evidence + evidence of earnings.
- Policy will pay out until earlier of work return, end of policy or death.
- Insurer can require periodic medical certificates during claim.
- If insured not expected to recover, insurer may pay a lump sum instead.
- if reoccurrence of illness, deferred period may be waived.
Only payable if resident within free limits and usually;
- UK or Ireland, EU and USA, Oz
- can suspend or cancel policy if reside out of free limit for more than a year
- will continue to pay if temp outside 3-6 months
Group policies - common features;
- eligibility, selective, terms and underwriting, benefit in kind, ceases when, deferred period what and why, max period, exclusions and ‘free cover’
- for most, all employees are eligible
- Employers cannot be selective in who is included
- Terms similar to individual but underwriting is simplified
- Company is policyholder and pays premiums which is not a benefit in kind
- cover based on pay and ceases on leaving or retirement
- deferred period normally 26 weeks to match SSP
- some have max claim period
- fewer exclusions compared to individual
- underwriters usually offer ‘free cover’ (amount insured without underwriting)
Taxation - individual policies and group policies taxation
Downside of IP - underwriting and payout
Selecting policy considerations (5)
- Individual polices are paid gross and not subject to income tax
- group policies paid without deduction of tax or NIC
Downside of IP;
- strict underwriting makes it hard to obtain cover on standard terms
- as only pays %, may leave gap on clients way of life.
When selecting a policy must consider;
- deferred period, definition of incapacity, benefit level, indexation/increases & guaranteed or reviewable premiums.
