Income protection provides some financial security by protecting a person’s income if they have an illness or accidental injury that means they cannot work and suffer a loss of earnings.
Full term income protection provides benefits which could be paid longer term up to a specified retirement age, for example 65 years old. This means full-term income protection can provide cover throughout a person’s working life.
Alternatively people can choose a limited payment term where benefits are paid for a set time – for example, five years. After this time the benefits and the policy would stop.
There are numerous short and long-term income protection products available in the market, so Martin Sincup, income protection manager of LV, says there are options to suit every budget.
Of course, he says it is always important that clients are aware before they purchase cover what their options are and when their chosen policy will pay out and for how long.
Clients can decide how much of their gross earned income they want to insure, Mr Sincup adds, typically up to a value of 55 per cent. A client can also opt for level cover or inflation-linked, he adds.
With most income protection products, Mr Sincup says you also have a choice between guaranteed and reviewable premiums.
With guaranteed premiums, Mr Sincup says a client’s premium is guaranteed and will not change unless inflation-linked cover has been chosen.
There is a choice to be made at outset prior to the plan starting of how long a time period should pass before the benefit is paid, according to Kevin Russ, technical manager of Friends Life Individual Protection.
He says this is known as the deferred or waiting period and could be a period of one, two, three, six, 12 and 24 months. Deferred periods can be tailored so Mr Russ says payments start when employer sick pay stops or to reduce the cost of the plan without reducing the benefit.
Additionally, Mr Russ says there are three typical definitions of incapacity which determine when the plan will pay out:
1) Own occupation: the client would not be able to do their own occupation.
2) Suited occupation: the client cannot do their own job or a similar one that suits their qualifications or experience.
3) Any occupation: the client would be too ill to do any kind of paid work.
Mr Russ says own occupation is the best definition for a client.
This has become the norm more recently, which first Aviva last year and now LV this year changing to write all of their individual income protection policies on an own occupation basis. Others, such as Bright Grey and Scottish Provident, have stated the vast majority of policies are now written on this basis.
Previous controversy has meant that previous incapacity definitions, such as activities of daily life, are rarely used now, though a number of older policies still in force may be written on this basis.
Mr Russ says different providers will offer different definitions of incapacity for different occupations so it is worth considering this when comparing quotes.
Tom Conner, director at Drewberry Insurance, agrees that definition of occupation is the key issue for advisers to look out for.
He warns advisers to be wary with any definitions other than ‘own occupation’ pointing out others such as activities of daily living require a claimant to be unable to compete a list of tasks before they can claim.
Advisers should highlight to their clients the maximum level of income that income protection can provide is slightly less than they had previously enjoyed before the illness or injury, says Dougy Grant, protection director of Aegon UK.
He says the client should not expect to be financially better off as a result of an income protection policy claim and the hope and expectation is to provide some income until they can return to work.
Mr Grant adds: “If the client has had a reversal in fortune and moved from a highly paid job to a lower-paid job at the time of claim, it is the income from the less well-paid job that will be considered in the claim.
“The actual benefit calculation takes place at the time of claim. It will vary depending on whether the client is employed or self-employed. For the employed it is generally a percentage of earnings in the 12 months prior to the illness or injury.
“For the self-employed, it can be a percentage of the firms net profits, averaged over the previous two or three years.
“If a client’s earnings fluctuate year on year, the client should keep his or her adviser informed of such changes so that the cover can be adjusted and they are not paying for cover they cannot benefit from.”
Mr Grant says another downside is the cover usually excludes the first 30 days of illness or injury and any medical conditions that existed when the insurance cover commenced.
Policy exclusions typically include self-inflicted injury and accidents or sickness resulting from drug or alcohol abuse, he adds.
Peter Hamilton, head of retail propositions at Zurich, says advisers should be aware that the customer’s current state of health at the time of applying for a policy or taste for high risk pursuits may affect the client’s eligibility.
He says, for example, hang gliders or potholers should expect to pay more than scrabble players. Discounts would be available for non smokers, he adds.
Full income protection providing long-term cover in the event of illness or accidental injury allowing multiple claims to be made is one of the most comprehensive forms of cover, according to Julie Higman, income protection product manager of Aviva.
Because of the level of cover offered, Ms Higman points out it can cost more than other forms of protection.Limited payment terms offer a cheaper alternative if price is an issue.
Ms Higman says multiple claims can be made but the overall claim period will be limited, for example to five years.
On the matter of other drawbacks, she says: “Income protection is a complex product and is normally sold on an advised basis to ensure the appropriate level of cover is taken out, taking into account what income the customer may receive from their employer or business if they are unable to work.
“Income protection does not pay out if the client becomes unemployed.”
Another downside with the product, according to Friends Life’s Mr Russ, is that income protection can be complex for advisers to set up initially.
He says: “If the client will still receive income after becoming ill, say through their employer’s sick pay scheme or from other sources, the amount of benefit could be reduced.
“Consideration needs to be given to the individual‘s income level and family circumstances which may mean that state benefit support could be lost by arranging income protection cover.
“This can be a complex scenario and means that each client requires individual assessment.”
