Income protection insurance


Income Protection Insurance is an insurance policy, available principally in Australia, Ireland, New Zealand, South Africa, and the United Kingdom, paying benefits to policyholders who are incapacitated and hence unable to work due to illness or accident. IPI policies were formerly called Permanent Health Insurance.

History

The original provider for this type of insurance is the Original Holloway Friendly Society, based in Gloucester. It was founded in 1880 by George Holloway.

Relevant concepts

Benefits

Income protection insurance policies offer a number of benefits in comparison to other insurance policies such as accident, sickness and unemployment insurance or personal accident and sickness :
There are a number of restrictions that can affect a policyholder's eligibility for income protection insurance:
The fact that the highly commoditized income replacement insurance no longer confers an intrinsic competitive advantage has led to product variations in the market. In addition to standard fixed-premium Income protection insurance policies there are a number of variations available from some life offices:
The choices involved and the potential for confusion and buying the incorrect product means it is considered essential that consumers consult an Independent Financial Adviser.

Pricing

IPI policies are relatively expensive due to the guarantees offered by the policy. However, premiums decrease as the deferred period increases and choosing a 'suited occupation' or 'any occupation' option over an 'own occupation' will likely reduce the cost of the policy. In 2014, some insurers launched a new variant called as "Guaranteed Age Rated". In this option, the pricing will go up as the policy holder gets older, but the pricing term i.e. by how much the premium is guaranteed on basis of a table that is provided at the inception of the policy.

Taxation

Premiums paid by employers to provide cover for their employees are tax-deductible as a business expense and are a taxable benefit to the employee. Benefit payments paid from the policy, following an accident or illness affecting the policyholder, are free of income tax and National Insurance contributions for individual policies. For group policies, benefits are paid as taxable and NIable earnings.

Regulation

IPI policies are classed as long-term insurance and are regulated by the Financial Services Authority under its Insurance Conduct of Business Sourcebook rules. This requires the issuing insurance company to keep records of the contract for a minimum of six years, and the policyholder has a minimum of 30 days to cancel the contract. If cancelled, the policyholder is entitled to a full refund of any premiums paid.

In Australia

Income Protection in Australia is designed to provide replacement of income to individuals who are unable to work due to illness or injury. Income Protection in Australia will generally replace up to 75% of a person's gross income. The majority of policies offered in Australia will provide benefits if a person is unable to conduct their own occupation, even when a policy is held within superannuation. There are however some high risk occupations where, if policies are available, they are offered on an 'any occupation' basis, either immediately on claim, or after an 'own occupation' claim period. Income Protection is available to employees and the self-employed, with greater importance held on the latter as the self-employed are generally not eligible for Workers' Compensation.
There are a number of options available under income protection policies and the ability on a person to receive claim payments will depend on the options taken at application. These include:
Insurers generally offer different levels of policies with varying inclusions and depending on options taken, premiums can vary significantly.

Risk assessment

Income protection is normally underwritten at application. Underwriting includes medical risk and also business and income risk. An application needs to provide medical history along with occupational information and history. An insurer can either increase a premium or apply an exclusion or limitation if an applicant presents a higher insurable risk.
An applicant also needs to substantiate income. When income is substantiated at application, any future benefit is normally 'agreed' with no further medical evidence required at claim. If no financial evidence is provided at application, income needs to be substantiated at application with the possibility of a lower claim benefit being payable if the claimant cannot confirm the income that was originally applied.
Claims
Getting a payout is not guaranteed, sick notes need to be provided and a report from your doctor, the Insurance company can take 2-3 months before payments start so best to have some emergency savings.

Taxation

Income protection is generally tax deductible to individuals, however claim payments are considered assessable income for taxation purposes
. Insurers rarely withhold taxation amounts and as such, individuals on claim need to keep funds aside in order to meet future taxation obligations.

In the UK

Deadline to the Breadline

A study by British insurer Legal & General, entitled Deadline to the Breadline Report 2014, found that only 8% of UK households have income protection insurance. This is despite the 29 days the study reports that it would take before the average UK household, if solely relying on savings and state benefits, would be unable to survive financially. This research aimed to highlight the help income protection insurance can provide, as well as the precarious position many UK households are in financially.

7 Families

Further work to bring the topic into the public domain appears in the 7 Families project. This charity-led campaign is providing seven people in the UK who have lost their income because of a serious or long-term illness, injury or disability with a tax-free income for one year. The campaign is documenting the effect this income has on their family life as well as the value of independent living support, rehabilitation and counselling, this educational approach receiving backing from groups like Disability Rights UK. The charity project aims to raise public awareness of the financial impact of a long-term illness or disability and is supported by a number of financial providers including Aviva, Friends Life and Zurich.