Features of Common Short Term Protection Policies

Short Term Protection Policies

Personal accident and sickness insurance (PAS)

  • PAS benefits are paid out if the insured suffers an accident or is off work due to sickness.
  • Most contracts are annual but can be taken for shorter periods, e.g. to cover a business trip or a holiday.
  • All PAS policies generally cover: death, permanent disablement, loss of an eye, loss of a leg, foot or toe, loss of an arm, hand, finger or thumb.
  • Two other benefits can be added: medical expenses and weekly sickness benefit.
  • Group PAS policies cover members of a group such as a firm’s employees or members of a social club.

Private medical insurance (PMI)

  • PMI provides cover against the cost of private medical treatment.
  • PMI is primarily aimed at acute, not chronic, conditions.
  • Accident & Emergency is not usually covered, partly because few private hospitals are geared up for such treatment.
  • Types of PMI:
    • budget plans— premiums can be reduced if the insured pays the first part of any claim. There may be restrictions to the limits on the cost of treatment. Home nursing and private ambulances are not covered;
    • standard plans — provide a wider cover than budget plans. More choice of hospitals together with higher limits on costs of treatment compared to basic plans;
    • comprehensive plans — claim periods can be longer with higher limits and there is often a wider choice of hospitals. Services such as home nursing and private ambulances are covered.
  • Taxation of PMI:
    • individual policies — claim payments are tax free and there is no tax relief on premiums;
    • group policies —the employee will be liable to benefit-in-kind tax if the employer pays the premiums. Such premium payments are also subject to employer’s NICs. However, the premiums are a deductible business expense for the employer’s corporation tax.
  • Some PMI policies operate on an Open Referral system where the insurer appoints the specialist and hospital often in conjunction with the patient.

Mortgage payment protection insurance (MPPI)

  • MPPI aims to provide the ability to maintain mortgage payments and costs for up to a normal maximum of twelve months or two years, depending on the policy.
  • Maximum monthly benefit of up to 125% of the mortgage payments, which include associated mortgage costs. Alternatively, it can be a percentage of the client’s income – eg 6% of income up to a maximum of £1,500 per month.
  • Benefits are paid after a deferred period which is typically 30 or 60 days. It might be different for accident and sickness as opposed to unemployment.
  • For unemployment insurance, a self-employed person may only be able to benefit if the business goes into voluntary liquidation. If they simply cease trading – eg because orders have dried up – the policy won’t pay out.
  • Benefits are usually payable for 12, 18 or 24 months only.
  • The cover is not tied to a specific mortgage and can be portable to a new mortgage. Policies may no longer be sold at the same time as a loan. Instead there must be a gap, which can leave borrowers uninsured.
  • Any income (eg from other insurance policies) will affect how much can be claimed.
  • The policy can be cancelled or withdrawn by the insurer at a minimum of 90 days’ notice or amended with at least 30 days’ notice.
  • The cost of MPPI tends to be high compared to the level of benefit.
  • Benefits are paid tax free and there is no tax relief on premiums.

Accident, sickness and unemployment insurance (ASU)

  • ASU or STIP (short term income protection) policies are very similar to MPPI but the insured benefit is not limited to mortgage payments.
  • Monthly benefit can be linked to earnings, e.g. 75% or a set amount, e.g. £2,500.
  • Benefits are payable for a maximum period of two years after a deferred period which is similar to MPPI.
  • A lump sum can be payable subject to conditions, e.g. loss of limb or sight.
  • Group ASU is sometimes limited to incidents occurring at work.
  • Taxation of ASU:
    • individual policies — benefits are paid tax free and there is no tax relief on premiums;
    • group policies — benefits are paid tax free, but premiums paid by the employer are taxable on the employee as a benefit in kind.

Health cash plans and dental plans

  • These are simple and relatively low-cost healthcare plans that pay up to 100% of the cost of treatment up to a pre-set annual limit or towards specified treatments, including optical and dental services.
  • There is often a waiting period of up to six months before claims can be made, and pre-existing conditions are usually excluded.
  • A dental capitation scheme are, in effect, a way of budgeting for expected dental costs rather than a true insurance against incurring dental costs.
  • Many dental plans pay a maximum benefit that may be below the charge made by the dentist, particularly where the patient elects to have more expensive treatment.

Payment protection insurance

  • PPI is similar to MPPI in terms of its structure and purpose, but may be taken out in conjunction with non-mortgage credit agreements such as unsecured car loans or other non-specific loan.
  • On 6 April 2012 new rules for PPI sales came into force which prevent PPI from being sold in the vast majority of cases until the later of seven days after the loan sale, or the point at which a personalised illustration is provided.

Policy considerations

  • Annually renewable and the premiums are subject to insurance premium tax.