This type of plan is designed to pay a regular sum to replace lost income. When purchased privately it is known as an Income Protection Policy (IPP) or Permanent Health Insurance (PHI). Loss of income can occur when someone cannot work as a result of sickness or injury. It is not usual for PHI plans to include a death benefit although unit linked plans can provide a small amount of life cover.
PHI plans insure an individual’s health rather than their life. Whereas critical illness plans pay a capital sum on the occurrence of certain specified medical conditions, PHI plans pay the income benefit following any illness or injury that is not specifically excluded.
The word ‘permanent’ is a little misleading. It means that the life office, regardless of the duration and frequency of any claims cannot cancel the plan if the plan owner is paying the contributions. The period of protection normally lasts for the client’s working life and finishes at age 60 or 65, i.e. they are not whole of life plans.
The life office accepts a considerable risk when it issues a PHI plan as the scope of cover is so far reaching.
Even though only a proportion of someone’s income can be protected (e.g. 60%), the sums of money involved for policies in payment over a number of years often amount to far more than the total of conventional life assurance.
There are a vast number of illnesses and injuries, which prevent people from working. Complaints, which would not result in a claim on a critical illness or life assurance plan, (stress and bad backs for example) could result in a claim on a PHI plan. On the basis that many life offices also offer index linked income benefits, it is no surprise that non-standard terms are more common on these plans.
Definition of disability
Each PHI provider has its own definition, but a typical wording might be “the claimant must”:
- have been in gainful employment at the start of the illness or disability,
- show that they can do no part of their job because of the illness or disability, and
- not be carrying on any occupation (whether paid or not).
It is usual for life companies to provide only a level of benefit which, when added to certain State benefits will produce an income of not more than 60 – 65% of the client’s pre-disability income. If they provided more than this there might be little incentive for the client to return to work! Income benefits usually cease when the client returns to work or recovers from the disability.
To avoid the administration and claims costs which would result from short term illness, it is normal for there to be a minimum period where no claim will be paid. Typically, deferred periods are defined in numbers of months and the minimum period is one month. A range of deferred periods is generally offered for example one, three, six and 12 months. The risk to the life provider is lower where the client selects a longer deferred period and the contribution for a given level of income benefit will also be lower. However, it is more important that clients select the deferred period that best meets their needs.
The most important factor in determining the level of risk to the life office is the individual’s occupation. Different types of work are grouped according to their level of risk. At one extreme are the purely clerical occupations that involve no heavy manual work or the handling of hazardous materials or machinery. At the other extremes are the occupations that are so hazardous that applicants are declined PHI protection. Contributions are heavily influenced by the applicant’s occupation.
How does group PHI differ?
Group PHI is offered by some employers, usually without cost to the employee. It provides benefits similar to those already described for individual PHI. The major additional benefit of group PHI is the availability of a level of free cover. This is the amount of benefit available without the need for medical evidence. This can be very useful for employees who are not in good health.
In addition to free cover, the contributions to group PHI schemes are usually cheaper than to individual PHI plans due to the economies of scale.
For individually owned PHI plans, the benefits are payable tax-free. For group PHI schemes contributions are paid for by the employer and the benefits are paid to the employer if the employee is off work sick or disabled. Consequently, tax relief is allowed on the contributions as an expense of the business and any benefits paid to the employer are taxed as an income to the business. If the employer chooses to pass any of the benefit on to their employee, this will be classed as salary and taxed in the normal way.
We can advise and recommend on an appropriate level of cover to suit an individual’s circumstances. Our very experienced insurance brokerage service compares all available plans from across the whole market from all possible life offices to ensure the best possible plan is selected for a client’s needs. We compare and consider metrics such as:
- Payout statistics
- Standard exclusions
- Indexation Options
- Financial Strength of the Insurer
- Underwriting Policy of Provider
Contact us today if you would like advice on Income Protection Insurance.