Income Protection Insurance

Statistics show that an individual of working age is approximately five times more likely to be off work as a result of illness or incapacity than they are to die.

Most Income Protection Insurance (IPI) plans are pure risk but a few policies are unit-linked such as Holloway policies which are issued by Friendly Societies and aimed at the self-employed that build up a cash value at retirement with profits.

Income Protection Insurance

Additional Employment Insurance

Some IPI insurers offer additional employment insurance which can be changed at the next policy renewal date and can be discontinued or have changes made to terms or premiums subject to a notice period. It is underwritten by a separate insurance company and is usually written as a monthly or annually renewable policy.

If a person is not in a paid occupation such as a housewife, benefit is payable based on:

  • failing a number of Activities Of Daily Working. This is a stricter definition than occupation-based definitions and requires the insured to be significantly impaired in terms of their ability to live a normal life.
  • failing a number of Activities Of Daily Living. This is a stricter definition than occupation-based definitions and requires the insured to be significantly impaired in terms of their ability to live a normal life.
  • functional ability test. This is a stricter definition than the occupation-based definitions above and requires the insured to be significantly impaired in terms of their ability to live a normal life.

Some IPI policies enable a claim to be made on one basis and then switch to a more restrictive basis after a claim has been made for, say, two years – eg from own occupation to suited occupation; or suited occupation to activities of daily working. Premium rates for these polices are cheaper than policies that remain on the original basis because the risk to the insurer is reduced.

Split Deferred Period

A ‘split deferred period’ is where the individual receives full pay from their employer for a number of weeks followed by half for a further period.

Automatic Increases To IPI Policies

Where an automatic increase is attached to an Income Protection Insurance policy, the policyholder should ensure the benefit does not increase to a level above the maximum amount that could be claimed given their current earnings. Where this is the case, the policyholder can decline the increase but some insurers reserve the right to withdraw future increases where 2 consecutive increases are declined.

Waiver Of Premium On Personal Pension Plans

Waiver of premium was offered on personal pension plans to April 2001 but policies taken out before this date can still benefit from tax relief for the Waiver of Premium element.

Care should be taken that maximum benefit from an IPI policy taken out after 2001 will not be restricted as a result of post-2001 pension Waiver of Premium being in place.

Long Term Care Insurance

Men have a one in five chance of needing care whereas women have a one in three. Although women live longer than men, they have a higher risk of needing long-term care before they die.

NHS continuing healthcare is often described as ‘fully funded care’ and meets the full cost of care in a care home for residents whose primary need for being in care is health-based.

Each local authority sets its own priorities in determining what funding is available for long term care and what severity of need is required to become eligible. Each individual’s health need is assessed by the patient’s Clinical Commissioning Group.

Individuals assessed as needing nursing care in a nursing home are entitled to receive nursing care allowance.

Long Term Care Insurance

Attendance Allowance

Attendance allowance can be claimed if the individual pays their own care fees and is paid by the DWP to eligible people over the age of 65. However, it can also be paid to younger people who qualify for Disability Living Allowance or Personal Independence Payments.

When assessing an individual’s level of contribution, the local authority must always leave them with a sum of money to cover some of their own personal expenses. This is called the PEA (personal expenses allowance) and is currently £24.40 per week.

Charging for Residential Accommodation Guide

Local Authorities must use national guidance for making assessments contained in a Department of Health document called CRAG (Charging for Residential Accommodation Guide) that takes into account income and capital when determining what local authorities can charge. None of these forms of income or capital would be taken into account by a local authority:

  • pension funds (although pension income is taken into account)
  • personal possessions
  • the surrender value of life insurance
  • investment bonds

Deferred Payment Plan

The value of an individual’s home is disregarded for twelve weeks from the date they enter a residential home.

If a person’s assets, excluding their property, are worth less than £23,250, the local authority cannot force them to sell their home. Instead a charge is put on the property to be repaid on death which allows the property to be rented. This is called a deferred payment plan.

Deliberate Deprivation

The burden of proof is with the local authority for proving deliberate deprivation but it only has to prove that deliberate deprivation was a significant motive – not the only motive.

When considering whether deliberate deprivation has occurred, a financial adviser should record the motives of the investor in a suitability letter.

Viatical Settlement

A viatical settlement provides an immediate cash benefit that is expressed as a percentage of the expected value of the policy to be paid out on death. It is a suitable option for someone with a terminal illness that has a prognosis of less than 36 months, particularly if they need care at home. It, effectively, converts a life assurance policy into critical illness benefit but it might affect means-tested benefit entitlement.

Types of Long Term Care Insurance

Home Reversion Plan

Types of Long Term Care Insurance

Long Term Care Insurance (LTCI) consists of three types:

  1. Lump sum to purchase care immediately (Immediate Care Plans)
  2. Pre-funded policies which are no longer around but might still be in existence
  3. Equity release plans

Immediate Care Plans

An Immediate Care Plan is an Impaired Life Annuity with special tax concessions: the provider assesses the future life span and quotes a lump sum premium. It is designed for people in poor health who already need care or who about to go into a care home. It will pay out for as long as the person needs the care with no time limit.

  • The individual cannot cancel their policy or get their lump sum premium back except in the cooling-off period.
  • The individual cannot get their monthly premiums back.
  • The individual must be unable to do at least one Activity of Daily Living or must be suffering from a cognitive impairment such as dementia.
  • The monthly benefits are paid tax free to the care provider registered with the Care Quality Commission.

Guaranteed Option of an Immediate Care Plan

The Guaranteed option of an Immediate Care Plan means that, if the individual dies shortly after the plan commences, all the premium aren’t lost.

Pre-Funded Investment-Linked Plan

A Pre-Funded Investment-linked plan is designed to provide long-term care funding and also some benefits after death for the policyholder’s heirs. It is a combination single premium investment bond and regular premium long -term care policy.

If care is never needed then the value of the bond is returned to the individual’s estate. This residual value will be the investment plus any growth minus the insurance premiums.

The premium needed to pay for the long term care insurance is withdrawn by the company each month from the value of the bond

Inheritance Tax and Pre-Funded Investment-Linked Plans

A Pre-Funded Investment-linked plan can be used for Inheritance Tax mitigation because, if the policyholder needs long-term care, there will be some benefits available to the policyholder and after their death for their heirs. If care is never needed, the value of the bond is returned to the individual’s estate.

Equity Release

If the individual seeking care has a high level of assets but a low level of income, equity release products are appropriate as long as there is no outstanding mortgage.

Lifetime Mortgage

A disadvantage of a lifetime mortgage is that the cash received from the mortgage could reduce or remove entitlement to means-tested benefits.

Home Reversion Plan Advantages

Home Reversion Plans are only available for people aged over 65.

In a home reversion plan, cash released can be in tranches (eg, 25% followed by another 25%) and a peppercorn rent is required. However, the individual can remain in the property until death or when it’s sold.

Home Reversion Plan Disadvantages

The disadvantages of home reversion plans are that it is unlikely the individual will get the market value for the property at the time it’s arranged. Also, plans are impossible to reverse and the individual is likely to lose out if they move quickly after taking out the reversion.

The value of the property will depend on the individual’s age and scheme, reflecting how the reversion company’s money is tied up.

Find out more information about long term care insurance.

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