Income Protection (IP)
IP policies are designed to replace lost income for an individual who, due to illness or accident, is unable to work for more than a specified period of time.
Benefits do not start to be paid unless or until the insured is unable to work for a longer period than the deferred period under the contract. However, most insurers offer a range of deferred periods to choose from, the most popular being 4 weeks; 13 weeks; 26 weeks; or 52 weeks. The longer the period the applicant is prepared to wait for benefits (i.e. the longer the deferred period), the lower the premiums will be because the insurer will not have to pay benefits for illnesses with shorter duration.
Once the benefits have started to be paid, they will continue until the insured returns to work, dies or reaches the expiry date of the contract.
There are usually restrictions applied to the level of benefit most insurers will offer. The maximum percentage is typically 50–60% of earnings, although some companies will offer up to 75% for lower levels of earnings.
Restrictions are imposed by insurers because they want to make sure that benefit claimants have an incentive to return to work.
This type of contract used to be called a permanent health insurance (PHI) policy. The reason for the term ‘permanent’ still applies in that once the insurer has issued the contract the office cannot cancel it as long as premiums continue to be paid, no matter how many times or for how long claims are made. The main exception to this is where there has been ‘non-disclosure’, e.g. the applicant did not tell them about a pre-existing condition.
Personal Accident and Sickness Cover
These accident and sickness policies also pay a regular benefit while the insured person is unable to work due to illness or following an accident. However, there are a number of differences between these contracts and income protection insurance:
- In addition to the regular benefit, accident and sickness policies may also pay a one-off lump sum if for example, the assured loses a limb, the sight of one or both eyes, or is permanently disabled.
- A second difference relates to the period of time for which this policy will pay benefits. The deferred period is likely to be very short (one to fourteen days, compared with at least four weeks for income protection contracts), but benefits will only be paid for a maximum of one or two years (as opposed to retirement age under income protection policies).
- A further difference relates to the much-reduced number of health and occupation questions asked on sickness and accident proposal forms, and the likelihood that a greater range of occupations are likely to be accepted (income protection underwriters will refuse a number of more dangerous occupations and exclude a range of pastimes from benefit payment).
Private Medical Insurance (PMI)
Every UK resident client is entitled to free health care from the NHS, but they may consider buying health insurance so that they can have a choice in the level of care they get. Clients don’t have to take out health insurance but they need to think about how they would be able to afford medical treatment if they didn’t want to use the NHS.
Like all insurance the cover varies – but basic private medical insurance may pick up the costs of most in-patient treatments (tests and surgery) and day-care surgery, while some extend to out-patient treatments (such as specialists and consultants).
Cover can be purchased on a full medical underwriting basis, which means the client will be asked a number of questions about their health and, based on the information they provide, the insurer will decide the conditions of the cover. Clients can also apply for cover on a moratorium basis, which means they will not be asked any questions about their health, but if they have suffered from any health conditions in the last five years these will initially be automatically excluded from cover.
Critical Illness Cover
Critical illness policies differ from income protection contracts in three ways:
- They pay a lump sum as opposed to a regular income (although some companies offer both arrangements).
- Payment is made on the diagnosis of specified illnesses only, regardless of whether or not that illness prevents the life assured working. Income protection contracts only pay benefits if the life assured is unable to continue working.
- Critical illness cover can be provided by stand-alone policies or incorporated in whole life, term or endowment policies.
Reviewable Critical Illness Cover
There is a trend towards reviewable critical illness cover products as the cost of guaranteed premiums increases, due to possible future medical advances in diagnostic techniques. Reviewable premiums are generally 15% to 55% cheaper than guaranteed ones and the gap is widening. The policies would be reviewed every five or ten years on the current rates, based on general advances in medical science at that time and not on individual circumstances or the individual life assured’s health.
Payment Protection Insurance (PPI)
Insurance policies which pay benefits if an insured person is made redundant from employment are usually only available in connection with a house purchase mortgage or some other form of loan, where the benefits will be used to meet the regular monthly payments under that loan. They are frequently packaged so as to also offer one or more of the following:
- Accident benefit;
- Sickness benefit;
- Unemployment benefit.
Therefore, these are sometimes known as ‘ASU’ policies.
There are no policies that will pay a significant lump sum on redundancy only and very few will allow a policy to be effected merely for general redundancy protection. Such offers would tend to attract applications from those who feel they have an above average likelihood of being made redundant, effectively selecting against the insurance company.
Mortgage Protection Insurance
- Provide accident, sickness and unemployment cover.
- Pay out after a maximum of 60 days off work.
- Provide cover for no less than twelve months. However, there are some basic exclusion clauses, such as medical conditions occurring in the year before policy commencement. Also, specialist medical advice will be taken before certain conditions are underwritten.
- Pay out to the self-employed who have informed HMRC that they have involuntarily ceased trading and have registered for incapacity benefit. Contract workers can claim benefits provided they have worked for the same employer for at least two years or have renewed an annually renewable contract at least once.