6: Income Protection Pt. 3

Question 1

Liam applies for income protection and does not disclose his pre-existing heart condition. What happens when he makes a claim for heart-related incapacity?

Answer 1

The insurer may deny the claim due to non-disclosure of a known condition.

Question 2

Emma moves abroad permanently after taking out income protection. How does this affect her policy?

Answer 2

The insurer may suspend or cancel her policy for residing outside the free limits.

Question 3

Noah suffers an injury but waits five months before notifying his insurer. How does this impact his claim?

Answer 3

His deferred period starts later, delaying benefit payments.

Question 4

Sophie takes up boxing after purchasing her income protection policy. What happens if she is injured while boxing?

Answer 4

She may not receive benefits if boxing is an excluded activity.

Question 5

Can you place an income protection policy in trust?

Answer 5

You can but it’s very uncommon and very little need to, depending on tax and estate planning purposes.

Question 6

Can an employer selectively offer group income protection to certain employees?

Answer 6

No, all employees within a defined category (e.g., full-time staff) must be included.

Question 7

Who is the policyholder in a group income protection policy?

Answer 7

The employer, and they are responsible for paying the premiums.

Question 8

Does group income protection count as a benefit in kind for employees?

Answer 8

No, premiums paid by the employer are not taxable benefits in kind for employees.

Question 9

What is the most popular deferred period in group income protection and why?

Answer 9

26 weeks; to align with Statutory Sick Pay (SSP), which lasts up to 28 weeks.

Question 10

How long do group income protection benefits typically pay out?

Answer 10

Until recovery, retirement, or reaching the policy’s maximum claim period (e.g., 5 years).

Question 11

Why have some employers introduced a five-year maximum claim period for group income protection?

Answer 11

Due to rising costs and more frequent job changes among employees.

Question 12

What happens if an employee leaves the company while on an income protection claim?

Answer 12

Cover typically ceases, unless an individual conversion option is available.

Question 13

What is meant by “free cover” in group income protection policies?

Answer 13

Employees are insured without medical underwriting, as long as all eligible staff enrol when first eligible

Question 14

Can employees buy additional cover within a group income protection policy?

Answer 14

Yes, some policies allow employees to increase cover or extend coverage beyond the employer-provided terms.

Question 15

What is key person cover in group income protection?

Answer 15

A policy that protects the employer from financial loss due to the absence of a crucial employee.

Question 16

How is key person income protection taxed when the employer receives benefits?

Answer 16

Benefits received by the employer are taxed as trading receipts.

Question 17

James is an accountant with group income protection. Can his employer exclude him from the policy?

Answer 17

No, employers cannot selectively exclude employees within a defined category.

Question 18

Sarah receives group income protection benefits while off work. How are they taxed?

Answer 18

The employer pays her as salary, so benefits are taxable income.

Question 19

Emma is a self-employed physiotherapist and buys an income protection policy to cover lost earnings during illness. Will her benefits be taxed when paid out?

Answer 19

No, benefits from individual income protection policies are not subject to income tax.

Question 20

Jake runs a dental practice and buys an income protection policy that covers the cost of hiring a locum while he is unable to work. How will his benefits be taxed?

Answer 20

Since the policy is a business expense, benefits will be taxed as business receipts.

Question 21

Olivia’s employer provides group income protection. When she claims benefits, who receives the payment first, and how is it taxed?

Answer 21

The insurer pays her employer tax-free, but when passed to Olivia, it is taxed under PAYE, and therefore liable to income tax and national insurance payments.

Question 22

Liam buys additional income protection cover through salary sacrifice. How will his claim payment be taxed if he becomes ill?

Answer 22

Both his salary sacrifice amount and his claim pay out will be taxed under PAYE

Question 23

Sophie purchases extra income protection cover (through her employer) with money she has already paid tax on. Will her benefits be taxed at claim time?

Answer 23

No, if bought with post-tax income, benefits may be paid tax-free.

Question 24

Noah’s employer offers income protection, but to compensate for tax deductions, the policy provides a higher maximum benefit. Why does the insurer do this?

Answer 24

To offset the tax impact, ensuring employees receive a meaningful amount after deductions.

Question 25

Daniel leaves his job while claiming income protection benefits. Does he continue to receive payments, and how are they taxed?

Answer 25

Cover normally ceases upon leaving employment, and no further benefits are paid.

Question 26

Alice’s employer is reimbursed by the insurer for income protection pay outs. Can the employer deduct this amount as a business expense?

Answer 26

Yes, employer-paid benefits are allowable as a deductible business expense.

Question 27

Ben moves abroad permanently and later makes an income protection claim. Will he still receive benefits?

Answer 27

If he’s outside the policy’s free limits, his claim may be suspended or denied.

Question 28

Mia is covered by a group income protection policy but wants her claim payments paid directly to her rather than through her employer. Can the insurer do this?

Answer 28

No, under group income protection, benefits must go through the employer first, then taxed via PAYE.

Question 29

Limitation on the income protection benefit payable is based on which earnings?

Answer 29

Average monthly earnings in the year prior to making the claim.

Question 30

Jeff is an employee of a firm that has a group income protection insurance scheme. If he becomes ill on 1 September 2024, when typically will it start to pay out benefits?

Answer 30

1 March 2025

Question 31

Under which definition of incapacity is the premium on an income protection policy likely to be lowest, for the same level, duration and scope of cover? Activities of daily living. Any occupation. Own occupation. Suited occupation.

Answer 31

Activities of daily living

Question 32

The premium charged for a new income protection insurance policy will be affected most by: mortality rates the policyholder's gender the deferred period the premium payment intervals.

Answer 32

The deferred period

Question 33

Igor has an individual income protection policy. His earnings are £35,000 per year and he receives dividend income of £5,000 per year. What is typically the maximum benefit that Igor might receive, ignoring any State benefits?

Answer 33

£21,000 (do not include the dividends)