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.
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.