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Income Protection Insurance is designed to replace lost income during periods of illness.

Statistically customers are much more likely to suffer a serious illness that prevents them from working than they are to die before they retire. Income Protection is therefore possibly likely to be of greater use to them than life insurance (assurance).

Income Protection cover is designed to pay the policyholder a tax free income until the policyholder either recovers sufficiently to return to work or the plan ends. This could mean the insurer is paying the policyholder an income for well over 20 years in a worst case scenario.

Terminology you need to know.

Deferred Period

This is the time between the life-assured being incapacitated and the benefit starting to be paid. This period is matched to your circumstances and in particular can be tailored to your contract of employment or self-employment and taking into account your personal savings.

Definition of Disability

Insurers are usually prepared to offer customers a discount if they are prepared to undertake any paid employment after a period of disability, as opposed to the customer having to be able to carry on the specific occupation they were engaged in immediately prior to the disability.

Own Occupation

This means that the life office will pay out the cover if an illness or injury prevents the life assured from doing the essential duties of their own occupation.

Work Tasks

This is the definition of disability that means the customer is insured against not being able to carry out any paid work. In practice this means that you would not be able to perform any two of the six work tasks listed below without the help of another person, but with the use of appropriate assistive aids and appliances;

Walking - The ability to walk 200 metres on a level surface with a stick or other aid without stopping or severe discomfort.

Lifting - The ability to pick up 1kg from table height and carry it for five metres.

Using a pen/pencil/keyboard - The ability to use a pen, pencil or keyboard with either hand or using any aids.

Hearing - The ability to hear well enough to understand someone speaking a common language in a normal voice in a quiet room with a hearing aid.

Speech - The ability to be understood in a common language in a quiet room.

Vision - The ability to see well enough to read 16 point print using spectacles or other aids.

Maximum Benefit

The “golden rule” for providers of Income Protection Insurance is that the customer should not be better off ill than they were healthy and working, otherwise there is no incentive to return to work and claims become disproportionately high.

The insurers vary in their approach to how much cover can be provided, with some deducting state benefits before making the calculation, which can be a very onerous calculation.

Many, however, use a straightforward, 50% of pre-disability income calculation (up to a specific salary, and then 33.33% above this level). Our software, and our new business systems will calculate maximum benefits for you using the insurer‘s rules so you don’t need to worry about these calculations.

Proportionate Benefit

This means that the insurer would encourage the customer back to work, even if part-time, by allowing them a gradual return to work which would increase the customer’s income.

For example:

Customer’s pre-disability income: £30,000

Income Protection Benefit: £15,000

Customer off sick completely

Income Protection Benefit: £15,000 (tax free)

Total Income: £15,000

Customer returns to part-time work

Part-time income: £12,000 (taxed as normal)

Income Protection Benefit* £9,000 (tax free)

Total Income: £21,000

*(£30,000 – £12,000 = £18,000 multiplied by 50% insurance = £9,000)

Index-linked

This means that both the benefits payable and the premiums rise each year to keep in line with inflation.

Plans are usually linked to the Retail Price Index, but could also be linked to National Average Earnings or a fixed percentage stated by the insurers.

It generally makes sense to consider Index Linking Income Protection Insurance as the cost of living generally rises each year, and without an index linked plan the benefit would lose it’s value over time.

Occupation Disclosure

Plans are underwritten on an occupational basis much more significantly than say life insurance.

In addition to having to be specific and accurate about occupation disclosure you need to check the policy wording as on some plans you need to advise the underwriter if you change occupations.

In Summary

These are all factors that affect the premium charged.

Extending the deferred period, for example, would reduce the cost as would accepting an 'any occupation' disability definition.

Obviously such changes may render the cover less attractive so careful consideration of the implications is crucial.