Financial protection

In this chapter we will examine the need for income protection, the features and product design of income protection insurance (IPI) plans, underwri...

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...nsurance company. By self-insuring the employer is responsible for paying any claims, whilst saving the cost of premiums for insurance.

 

Most employed or self-employed people rely on their ongoing ability to work and earn an income to support their current standard of living and to maintain it into the future when they stop work. Some employed individuals will have access to employer provided sick pay, meaning they receive a continuation of their earnings during an initial period when they are unable to work due to illness or incapacity. This benefit will be limited to payment over a specified period, perhaps between 6 and 12 months, if incapacity lasts longer than this there will be reliance on State benefits, which are likely to be much lower than the claimant’s usual earnings.

The need is much more pres...

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...how long these would be able to support the income requirements, by drawing down from the capital

The availability of State benefits: whether there is a sufficient NIC record to qualify for contributory benefits, such as Employment and Support Allowance, or whether there is access to any other benefits, such as Universal Credit, if the individual’s NIC record is incomplete

Taking all these factors into account helps to establish whether a shortfall would occur and how much cover is required.

When compared to an individual who is employed, why might the need for income protection be more pressing for someone who is self-employed?

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Income protection insurance (IPI) is a long-term insurance that is designed to protect an individual’s standard of living by paying out a weekly or monthly benefit if the insured is ill or otherwise incapacitated under the terms applicable to the policy. Once the plan has been underwritten and is in force, as long as the insured maintains premium payments and adheres to the plan’s terms and conditions, the insurance cannot be cancelled by the life office (or premiums increased), regardless of the number and duration of claims made, this is why IPI was previously referred to as ‘permanent health insurance’.

Policies are usually written over a specified term, typically to the insured’s expected retirement / State pension age, after which the plan will cease. Claims in payment will cease at the earlier of the insured’s return to work, their death or the policy’s pre-determined end date, even if the insured remains incapacitated. Policies are usually non-assignable.

Some ‘short-term’ IPI policies aim to keep premium costs down by limiting the benefit period to, for example, a maximum of between one and five years. Such policies m...

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...n when considering any changes to a pre-6 April 2001 plan. Tax relief is not awarded in respect of the premiums to provide WoP as part of a pension contract taken out on / after 6 April 2001. Any personal pension linked WoP taken out on / after 6th April 2001 and all pension linked WoP taken out on / after 6 April 2006 had to be arranged as a separate contract, with no tax relief on the premiums

Unemployment insurance

Some insurers offer unemployment insurance as an additional element on their income protection policies. This is usually written as a separate, annually renewable general insurance contract (see topic 9), meaning that premiums and terms and conditions can change at each renewal date, or at any time subject to six weeks’ notice being given to the policyholder.

It is common for providers to apply an initial waiting period that, from the policy start date, must elapse before a claim can be made.

Whilst the customer may see the unemployment as part of a single income protection proposition, it is possible that this aspect is provided by a different insurer.

What benefit is payable from an income protection policy?

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Income protection plans generally contain the following features:

Deferred period

This is the initial waiting period between the onset of the illness or incapacity and commencement of benefit payment. Common deferred periods are 4, 13, 26 or 52 weeks, although some policies may provide that benefit payment commences after as short a period as 7 days and others allow a deferred period of 104 weeks. An employed person might wish to have a deferred period that enables benefits payments to commence when their employer provided sick pay ceases. As the income of a self-employed typically ceases soon after they become incapacitated, a shorter deferred period is more suitable. The shorter the deferred period selected, the higher the chance of a claim so the higher the premium.

The Benefit

In the event of a claim the benefit may be paid up to a pre-determined maximum age (usually aligned with the insured’s expected retirement / State pension age so typically ranging between 55 and 70) or may be paid over a shorter term such as 2 -5 years. The longer the period over which the benefit will be paid, the higher the premium

Benefit limits

There are limits on the maximum amount of benefit paid from an individual income protection policy to ensure that a claimant will not be better off by claiming. For individual policies, this is generally 50...

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...ists would cause an undue delay

Automatic or discretionary payments to encourage the insured to return to work or additional payments if the insured is hospitalised

Cognitive therapy, to reduce stress

Advise on appropriate adaptions to the workplace

Helplines, employee assistance programmes and digital GP services

Facilitate return to work programmes

Incentives

Insurance companies are increasingly focussed on rewarding those who take steps to improve / maintain their health. This includes discounts for gym membership and in retail outlets, if certain fitness targets are met.  

Linked periods of illness

If an insured individual makes a claim, returns to work and then has another period of illness with the same condition, it is normal practice for the deferred period to be waived on the second and subsequent claims for the same condition.

Financial benefits

An automatic or discretionary payment may be made to help the insured return to work, or if the insured has to spend time in hospital. If the po0licy doesn’t contain specific provisions, the insurer may be willing to make payments that will help the insured return to work, or when they have returned to work, to help cover additional costs.

In the event of a claim, an IPI policy may pay a proportionate benefit if:

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Insurers all have their own definitions of incapacity and this is usually linked to the insured’s occupation.

Own Occupation - where the insured is unable to carry out their own occupation and is not undertaking any other employment. This is the widest definition and provides the highest level ...

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...hange once a claim has been in payment for a certain period of time, perhaps changing from an ‘own’ to ‘suited’ occupation after a period of two years (for example).

What are the three main definitions of incapacity used by IPI insurers?

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Most IPI plans have various general exclusions under which circumstances a claim would not be paid. In general, these are if incapacity is a result of:

HIV/AIDS generally only covered by a few providers but there has been a general shift to coverage. Previously claims arising from HIV/AIDS were only covered if contracted by an emergency services worker in the course of their duties or as a result of a blood transfusion

Normal pregnancy and childbirth

War, invasion, acts of a foreign enemy

Self-inflicted injury

Involvement in a criminal act

Misuse of alcohol or drugs

Failure to follow medical advice

Fly...

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...olicy is in force. However, it should be noted that when a claim is made the definition of incapacity is based on the insured’s occupation immediately before making the claim. Therefore, if someone made a claim during a period of unemployment, for example, they could find that their benefit amount is reduced to the house person’s amount or potentially, depending on the policy, receive no benefit at all. It is therefore important to read the terms and conditions of the policy carefully.

Name three general exclusions that will be included in most income protection policies.

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The underwriting of IPI is fundamentally different to that for life assurance. In assessing a proposal for IPI the underwriter is concerned with morbidity (the risk of being ill or disabled) rather than mortality (the risk of dying). Statistically, an individual is much more likely to be ill and survive than to die and women suffer more ill health than men.

Occupational Classes

Certain occupations are considered riskier than others. Some occupations will not be covered at all by insurers and other occupations are categorised by the level of risk they represent:

Class 1 (lowest risk) -...

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...

Insured, including their age, occupation, general state of health and their smoker status

Specification of the policy, including the deferred period, selected, the level of benefit, policy term and any escalation options

Whilst, statistically, women are more likely to suffer ill-health than men are, the provisions of the EU Gender Directive applies to all personal insurance contracts and premiums must be set on a unisex basis.

Which occupational class would you expect the manager of a retail store who carries a range of roles in the shop to fall within?

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Claims should be made in writing as soon as possible after the insured becomes incapacitated, even though it may still be several months until the deferred period ends and payment of benefit commences. This allows the insurer to start dealing with preliminary elements of the claim and they will:

Assess the claim against the applicable definitions of incapacity

Consider whether additional medical e...

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...for a certain amount of time, e.g. where own occupation definition changes to any suited occupation after a period of two years. This change is significant as the individual may not be eligible to continue to receive benefits under the stricter criteria.

Why would an insurer request a payslip or a P60 from an individual who has made a claim of their IPI policy?

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Generally, benefits from individually held IPI policies, arranged on a personal basis direct with an insurance company, are paid gross and are not subject to income tax or National Insurance contributions (NICs) However, where the premiums are tax relievable as a business expense, typically if a...

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...d through the pay as you earn (PAYE) system.

Where the benefit is taxable the insurer will often allow a higher percentage of the salary to be insured.

Where benefits are paid from an individual income protection policy the tax implications are that:

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Some employers provide income protection for their employees. This may be as an additional benefit for the employees or to provide compensation to the employer for the extra costs they may incur when an employee is off sick.

The employer is the policyholder, administers the scheme and pays premiums to the insurance company; employer paid premiums are not taxed as a benefit in kind on employees who join the scheme

Under most schemes, all employees are eligible; employers cannot be selective and must ensure that all employees within a defined cat...

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...employee is off work, the employer will not have to fund salary payments to a worker who is unable to contribute to the business

Insurers may offer ‘free cover’ – an amount of insured cover without requiring any medical underwriting – provided that all eligible employees are actively in work on the day they are eligible to join the scheme and all employees join.

In the event of a claim, how would an employer normally pay the benefits from a group IPI  scheme to their employee?

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This revision test (opens in a new...

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... test will be added to your CPD certificate.