6: Income Protection Pt. 1

Question 1

Income protection pays out in the event that the policyholder is unable to do what?

Answer 1

Work (loss of earnings) because of long-term illness or incapacity

Question 2

Why is income protection often referred to as a permanent health insurance?

Answer 2

It’s a permanent policy which is not renewed each year, or cancelled, in light of bad claims experience. i.e., not matter how many claims you make, your cover will remain.

Question 3

The selling and marketing compliance of pure income protection is written under which FCA Prudential sourcebook?

Answer 3

ICOBS (Insurance Conduct of Business)

Question 4

What are the key differences between income protection and payment protection policies?

Answer 4

PPI is short term, and payment periods tend to be limited.

Question 5

The amount of cover required for income protection depends of which 3 main factors?

Answer 5

1. Level of essential expenditure
2. Maximum permitted level of cover allowed by insurer
3. Level of essential expenditure, less current financial resources

Question 6

What are the typical deferred periods for income protection, and what the longer periods?

Answer 6

13 - 26 weeks is typical
52 - 104 weeks are longer

Question 7

Benefits for income protection are limited to specified percentages of pre-claim income. What are the limited typically?

Answer 7

50-60% for individual policies
Up to 75% group policies

Question 8

Why do group income protection policies pay a higher (albeit limited) benefit over individual policies?

Answer 8

Group policies have to factor in tax on the payments

Question 9

What is usually the maximum age for receipt of income protection benefits?

Answer 9

Retirement age

Question 10

What is an income protection day one policy and how does it differ from back to day one?

Answer 10

Both aimed at self-insured. Day one pays benefit from day one of illness or incapacity (no deferred period).

Back to day one pays after a deferred period, but back dates to day one.

Question 11

What is meant by pure protection?

Answer 11

Non-investment linked

Question 12

Investment/unit linked policies are written under which FCA Prudential sourcebook?

Answer 12

COBS

Question 13

What is a Holloway policy?

Answer 13

Often purchased by self-employed from friendly societies. They build up a cash value at retirement along with profits.

Question 14

Holloway policies with a small investment element, meeting certain criteria, are exempt from the RDR rules. True or false?

Answer 14

True

Question 15

What are the key differences between income protection, and unemployment insurance?

Answer 15

IP long-term, UI short-term. UI is renewable, IP is not.

Question 16

What are the 3 definitions of incapacity and what do they mean?

Answer 16

Own occupation: the life assured is unable to perform their own occupation

Suited occupation: the life assured is unable to perform any occupation to which they are suited through training or re-education

Any occupation: the life assured is unable to perform any occupation at all

Question 17

Choosing which type of incapacity for your income protection will make you premium more expensive?

Answer 17

Own occupation

Question 18

If the claimant is not in an occupation (i.e., homemaker), how is the income protection benefit due assessed if they don’t fit into an occupational capacity?

Answer 18

ADW - failing a number of activities of daily working
ADL - “ daily living
FAT - functional ability test

Question 19

What is a split-deferred period in income protection?

Answer 19

Allows benefits to be paid in stages, aligning with an individual’s sick pay arrangements. For example, an initial pay out may begin after six months to supplement reduced sick pay, with full benefits kicking in after a year when sick pay stops.

Question 20

Who would benefit from rehabilitation benefit on their income protection?

Answer 20

Someone who has gone back to work but at a lower level of earnings, perhaps because they are no longer full time, the benefit tops up their earnings.

Question 21

What is the benefit to the insurer in providing rehabilitation benefit?

Answer 21

Hopes the claimant will not be put off returning to work just because the pay is lower.

Question 22

What are the key differences in between rehabilitation and proportionate benefits?

Answer 22

Rehabilitation = insured returns to their original job but on a lower level of earnings due to reduced working hours or capability.

Proportionate benefit = insured cannot return to their old job but can take up a different, lower-paid role.

Question 23

What are the 2 main ways of increasing income protection benefits to protect against inflation, without need for further medical underwriting?

Answer 23

1. Linking to a measure of inflation such as RPI/CPI
2. Increasing by a pre-determined percentage each year.

Question 24

Why might a pre-determined annual increase in income protection benefits not be ideal?

Answer 24

It could increase above the maximum amount that could be claimed given their current level of earnings.

Question 25

Pre-determined annual increases in income protection can be declined how many times before the insure may remove the increase benefit entirely?

Answer 25

Two consecutive times

Question 26

What is added to an income protection policy that allows the benefit to increase to a pre-set limit on specific life events?

Answer 26

Guaranteed insurability option

Question 27

Income protection only provides financial help. True or false?

Answer 27

False - many insurers now look to provide practical help as well as financial

Question 28

An insurer may provide an automatic discretionary payment to help the claimant return to work, even if this is not stipulated in their policy conditions. True or false?

Answer 28

True

Question 29

What are the typical charges for adding waiver of premium to an income protection policy?

Answer 29

2-5% of the insured premium

Question 30

Why do insurers put a limit on the benefit payable that doesn't meet the total current earned income?

Answer 30

To prevent claimants thinking they are better off not working

Question 31

How does Universal Credit impact income protection policy payments?

Answer 31

Individual income protection benefits are non-taxed income and may reduce Universal Credit entitlement £ for £.

Question 32

Why do some income protection policies offer a guaranteed benefit level?

Answer 32

To avoid insurers needing to re-underwrite financial benefits when a claim is made, ensuring certainty for the policyholder.

Question 33

How do budget income protection policies differ from standard ones?

Answer 33

They may only cover essential expenditures like mortgage costs, potentially leaving the insured with insufficient income.

Question 34

Why do group income protection schemes typically provide higher benefit levels?

Answer 34

Because the benefit is paid to the employer, who then passes it to the employee as salary, making it subject to tax and NICs.

Question 35

How do insurers adjust benefit limits for very large policies?

Answer 35

They might reduce the cap to 25%-35% for high-income individuals. Alternatively, insurers may apply a tiered approach. They do this to manage risk for very high earners.

Question 36

Why does earlier cover cessation result in lower premiums?

Answer 36

Because the risk to the insurer is lower, reducing the cost of providing coverage.

Question 37

What life factors might change the need for income later on?

Answer 37

Mortgage payments may be completed, and children may no longer be financially dependent.

Question 38

Up to what age are more insurers prepared to provide cover today?

Answer 38

Many insurers now offer coverage up to age 70 due to longer working lives.