Income Protection Insurance Policies Benefits to Other Insurance Policies. Income Protection Insurance, the meaning of Income Protection Insurance (IPI) in an insurance policy, which is available principally in different countries likes as Australia, New Zealand, Ireland, South Africa, and the UK (United Kingdom). The paying benefits to insurance policyholders who are incapacitated & hence unable to work due to any kind of illness or any kind of an accident. Income Protection Insurance (IPI) policies were formerly called (PHI) Permanent Health Insurance. The Income Protection Insurance (IPI) original provider for this type of insurance is the Original Holloway Friendly Society, based in Gloucester. It was founded in 1880 by Mr. George Holloway.
Income Protection Insurance Policies Benefits to Other Insurance Policies
· Relevant concepts for Income Protection Insurance
- Incapacity will be defined on one of the following four bases in protection insurance:
- Insurance policyholder Own occupation – the insurance policyholder is out of action if they are unable, following illness or accident to perform their own profession and are not working in another employment job.
- Insurance policyholder Suited occupation – the insurance policyholder is incapacitated if they are unable, following illness or accident to perform an occupation suitable to them given their education and training etc.
- Life Insurance policyholder any occupation – the insurance policyholder is incapacitated if they are unable, subsequent illness or accident to perform any career at all.
- Insurance policyholder Activities of daily living (ADLs) – the insurance policyholder is incapacitated if they are unable, following illness or accident to perform a number of defined functions such as dressing and undressing, washing, eating, shopping, climbing stairs, cooking etc. The insurance policy will define the number of functions & their all definitions.
- Insurance policy Benefits limits – nearly all policies limit the benefit allocated to some percentage of the insurance policyholder’s normal income. The limit is typically around 70% of gross income, but could be less for elevated earners. Any state profit payable may reduce the greatest benefit and profit from any other policies may also decrease the highest.
- Claim Deferred period – the deferred period is the time between a valid claim and the origination of benefit payments. The deferred period chosen has a important power on the cost of a life insurance policy (see below).
- Proportionate benefits – to encourage the return to work of a insurance policyholder recovering their health, many life offices offer to pay a reduced benefit if the life insurance policyholder takes a part-time or lower-paid job after recovering their health.
- Free limit – the IPI insurance policy will be only be valid while the life insurance policyholder is permanently resident in the area defined in the life insurance policy. The area will be at least the United Kingdom, probably the EU or Western Europe and could include the United States and other developed countries. Most policies will allow holidays and temporary residences outside of these areas.
Benefits of Income protection insurance policies
Income protection insurance policies offer a number of benefits in comparison to other insurance policies such as accident, sickness and unemployment insurance or private personal accident and sickness (PAS):
- Insurance Policy Benefits are payable when the insurance policyholder becomes incapacitated and after the deferred period has passed and continue until the earliest of death, recovery of health, retirement or the term of the contract.
- Insurance Policy Benefits are paid regularly (usually weekly or monthly) and may be free of tax.
- The insurance company cannot cancel or refuse to renew the insurance policy provided that the insurance policyholder continues to pay the premiums.
- A waiver of premium option may be provided whereby premiums for the IPI insurance policy are not required while benefits are being paid from the insurance policy, but the insurance policy cover continues as normal.
There are a number of restrictions that can affect a insurance policyholder’s eligibility for income protection insurance:
- The insurance policies do not pay out if the life insurance policyholder becomes jobless for a reason other than illness or accident.
- The deferred period is usually quite long, often a minimum of 4 weeks but perhaps as long as 50+ weeks. Premiums decrease as the deferred period increases.
- There are a number of exclusions which apply to most policies, so that no benefits are payable for accidents or illness arising from events such as drug or alcohol abuse, criminal acts, intentional self-harm, wars and pregnancy.
- Due to the benefit limits to the insurance policy holder, the highest regular payment is usually restricted to prevent moral hazard – if the benefit exceeds the insurance policyholder’s income they have a reduced incentive to return to work once their health recovers.
- On change of unemployment or occupation of the auto insurance or life insurance policyholder the insurance policy may become invalid, or the life insurance office may require the insurance premiums to be changed to reflect the new risk.
- For private individual policies, as the benefits paid are not chargeable income, the tax relief available to the all insurance policyholder may be reduced so, for example, tax relief on pension contributions is no longer available.
Insurance Product variations
In addition to standard fixed-premium Income protection insurance policies there are a number of insurance variations available from some life offices:
- Renewable IPI – renewable policies give the insurance policyholder a right to renew the life insurance policy, possibly with an increase in cover, at a set period (often 5 years), based on the prevailing premiums for a person of their age and occupation. Premiums will initially be cheaper than a fixed IPI insurance policy but will then increase each renewal as the insurance policyholder gets older.
- Re viewable IPI – the term of a re viewable IPI insurance policy will be the same as a fixed insurance policy, but the premiums will be reviewed (and almost invariably increased) by the life office every few years, based on its general rates (not based on the health or claims of the insurance policyholder). Initial premiums will then be cheaper than for a standard insurance policy.
- Increasing IPI – the value of the benefit payable by a fixed-benefit insurance policy is eroded over time by inflation so policies whose benefits increase are often more suitable. The benefits may increase at an indexed rate (such as the Retail Prices Index), a fixed percentage or by a percentage chosen by the insurance policyholder every few years. For such growing policies, premiums usually increase as well.
- Unit-linked IPI – other IPI policies have no investment element and hence no surrender value, however a unit-linked insurance policy has an investment element similar to unit-linked life assurance policies. Premiums will normally be more expensive than standard policies due to the investment element, and could be still more expensive if the return on the invested premiums is poor.
- Group IPI – employers may provide a group IPI insurance policy for their employees. For group policies a maximum payout period may apply and the insurance policy will expire if the employee ceases employment with the employer.
Suitability and need
- IPI policies meet the general need of wage earners to protect their income against the inability to work due to accident and illness. The level of state benefits provided (such as statutory sick pay (SSP) and incapacity benefit) usually falls well below the income of average earners, so additional insurance is required to make up the difference. If an insurance policy is purchased it is usual for the term of the insurance policy to last until the retirement age of the insurance policyholder. For those not working such as parents caring for children, a insurance policy paying out based on ADLs is appropriate as the definitions for incapacity based on occupation may not be relevant.
- IPI policies are not suitable insurance against unemployment in general as benefits are only paid if the unemployment arises due to incapacity. An accident, sickness and unemployment insurance policy or Mortgage Payment Protection Insurance may be needed as an alternative or to complement the IPI insurance policy.
- IPI policies do not provide health insurance policy, death benefits or critical illness cover, so health insurance and/or life assurance and/or critical illness cover may also be needed by the insurance policyholder.
The choices involved and the potential for confusion and buying the incorrect product means it is considered essential that consumers consult an Independent Financial Adviser (IFA).
Insurance Policy Pricing
IPI policies are relatively expensive due to the guarantees offered by the insurance policy. But, premiums decrease as the deferred period increases and choosing a ‘suited occupation’ or ‘any occupation’ selection over an ‘own occupation’ will likely reduce the cost of the life insurance policy. In 2014, some insurers launched a new variant called as “Guaranteed Age Rated”. In this option, the pricing will go up as the insurance policy holder gets older, but the pricing term i.e. by how much the premium is guaranteed on basis of a table that is provided at the inception of the insurance policy.
Premiums paid by employers to provide cover for their employees are tax-deductible as a business expense and are a taxable benefit to the employee. Benefit payments paid from the insurance policy premium, following an accident or illness affecting the insurance policyholder, are free of income tax and National Insurance contributions for individual policies. For group policies, benefits are paid as taxable and NIable earnings.
IPI policies are classed as long-term insurance and are regulated by the Financial Services Authority (FSA) under its Insurance Conduct of Business Source book (ICOBS) rules.This requires the issuing insurance company to keep records of the contract for a minimum of six years, and the insurance policyholder has a minimum of 30 days to cancel the contract. If canceled, the insurance policy holder is entitled to a full refund of any premiums paid.
Income Protection Insurance in Australia
Income Protection in Australia is designed to provide replacement of income to individuals who are unable to work due to illness or injury. Income Protection in Australia will generally replace up to 75% of a person’s gross income. The majority of policies offered in Australia will provide benefits if a person are unable to conduct their own occupation, even when a insurance policy is held within superannuation. There are however some high risk occupations where, if policies are available, they are offered on an ‘any occupation’ basis, either immediately on claim, or after an ‘own occupation’ claim period. Income Protection is available to employees and the self-employed, with greater importance held on the latter as the self-employed are generally not eligible for Workers’ Compensation.
There are a number of options available under income protection policies and the ability on a person to receive claim payments will depend on the options taken at application. These include:
- Waiting Period – the length of time from date of illness or injury that a person needs to be disabled prior to benefit entitlement. The waiting periods available include, 14 days, 30 days, 60 days, 90 days, 180 days, 1 year and 2 years. The longer the waiting period the cheaper the premium.
- Benefit Period – the maximum length of claim per event. The options include 6 months, 1 year, 2 years, 5 years, until age 65 and until age 70.
Insurers generally offer different levels of policies with varying inclusions and depending on options taken, premiums can vary significantly.
Income protection is normally underwritten at application. Underwriting includes medical risk and also business and income risk. An application needs to provide medical history along with occupational information and history. An insurer can either increase a premium or apply an exclusion or limitation if an applicant presents a higher insurable risk.
An applicant also needs to substantiate income. When income is substantiated at application, any future benefit is normally ‘agreed’ with no further medical evidence required at claim. If no financial evidence is provided at application, income needs to be substantiated at application with the possibility of a lower claim benefit being payable if the claimant cannot confirm the income that was originally applied (indemnity).
Income protection is generally tax deductible to individuals, however claim payments are considered assessable income for taxation purposes . Insurers rarely withhold taxation amounts and as such, individuals on claim need to keep funds aside in order to meet future taxation obligations.
Income Protection Insurance in United Kingdom
Deadline to the Breadline
A study by British insurer Legal & General, entitled Deadline to the Breadline Report 2014, found that only 8% of United Kingdom households have income protection insurance. This is despite the 29 days the study reports that it would take before the average United Kingdom (UK) household, if solely relying on savings and state benefits, would be unable to survive financially. This research aimed to highlight the help income protection insurance can provide, as well as the precarious position many UK households are in financially.
Further work to bring the topic into the public domain appears in the 7 Families project. This charity-led campaign is providing seven people in the United Kingdom who have lost their income because of a serious or long-term illness, injury or disability with a tax-free income for one year. The campaign is documenting the effect this income has on their family life as well as the value of independent living support, rehabilitation and counseling, this educational approach receiving backing from groups like Disability Rights UK. The charity project aims to raise public awareness of the financial impact of a long-term illness or disability & is supported by a number of financial providers including Aviva, Friends Life and Zurich.