C6 Income Protection

Income protection is a long-term contract so…

Cannot be cancelled by insurer as long as policy conditions met (e.g. premiums)

Income protection is regulated by…

ICOBS

Needs for income protection include…

• benefits from employer

• maximum level of cover allowed by insurer

• level of expenditure

• other continuing income

Standard IP…

• pays out after deferred period until person returns, dies or end of policy

• has benefit limited to 50-60% income (up to 75% if group)

Limited term IP…

• pays only for certain period like 1-5 years

• has lower cost but lower value

Day one IP…

• is for self employed as no deferred period

• pays weekly to help with cashflow (expensive option)

Back to day one IP…

Pays benefit after 30 days which is backdated to day 1 (slightly cheaper)

Investment linked IP…

Has pure risk/some have investment element (under COBS instead)

Unemployment insurance…

Can be offered as part of insurer’s IP proposition

For IP, occupation can be classed as…

• own (highest cover)

• suited or any - may no longer need to notify of change of job but definition is based on job prior to incapacity

Features of income protection include…

• deferred period

• permanent (to retirement)

• rehab/proportionate (reduced benefit)

• benefit limit (to provide incentive to return)

• additional benefits (counselling, digital GP)

• increasing cover (with RPI or fixed %)

• waiver (covers premiums)

Limitations of IP are…

• state benefits may need to be deducted

• max pay out limits (e.g. £2k pm)

• no earnings or low earnings, limit to £15k - £18k py

• budget policy may limit to mortgage costs only

An IP policy normally ends…

• at age selected by individual at outset

• at provider limit (e.g. SPA, 70)

IP underwriting is based on…

Morbidity not mortality, so more detailed questions.

Factors that affect IP premiums include…

• age

• deferred period

• term

• smoking status

• escalation options

Moral hazard can exist through…

Deliberately over insuring by not being honest e.g claiming to be paid higher wage to get more IP.

An IP policy may be…

• issued on standard terms

• subject to loading

• subject to exclusion

• declined or postponed

For IP premiums, the most important factor is…

Occupation, as some jobs have higher incapacity risk than others

The classes of occupation are…

• class 1 - admin, managerial, clerical

• class 2 – shop workers, hotel and catering staff, light manual

• class 3 – skilled worker (non-hazardous)

• class 4 – heavy manual or skilled hazardous worker

Premium rates are based on…

Class 1 as default, with extra loading to reflect risk.

Guaranteed premiums means…

Premiums stay the same throughout term, so are higher.

Reviewable premiums means…

The premiums are periodically reviewed, usually every 5-10 years

With reviewable policy the insurer…

Reserves right to review policy in light of claims.

When a claim is made, they should be…

In writing as soon as possible.

Upon a claim he insurer can request…

Medical reports and examinations.

For linked periods of illness, the deferred period is…

Waived on second claim.

An IP policy will not pay out for…

• Alcohol/drug abuse

• Criminal acts

• Flying (not as a passenger in commercial aircraft)

• Hazardous sports

• AIDS or HIV

• Self-inflicted injury

• Failure to follow medical advice

• Disabilities arising from war, invasion etc

• Pregnancy, childbirth

• Living abroad (outside the ‘free limits’)

• Deliberate/reckless non-disclosure

• Careless non-disclosure = proportionate remedy rather than exclusion

Group IP policies…

• higher max benefits

• paid to employer who pays employee

• taxed as income for employee

• simpler underwriting

• employer pays premiums - not benefit in kind

• deferred period usually 26 weeks

Key person cover can be taken out…

By employer/taxed on employer as trading receipt.

For tax purposes, individual policies are…

Paid gross with no income tax due.

If business treats premiums as allowable expense, the benefit is…

Taxable as business receipt.

For tax purposes, group policies are…

Paid gross to employer but taxed on individuals under PAYE.

If employee buys additional cover in group policy with post tax income…

The benefits may be paid tax free.

Advantages and disadvantages of IP are…

• Pro - ongoing income (tax-free if individual policy) to replace lost earnings

• Con – strict underwriting

• Con – maximum benefit limited to % of earnings

When selecting a policy, you should consider…

• definition of incapacity

• deferred period available

• benefit level

• indexation/increases

• guaranteed/reviewable premiums