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Income protection
What is income protection?

An income protection policy (previously known as Permanent Health Insurance or PHI) is designed to replace your income if you are unable to work due to illness or accident.

The amount of benefit insured will depend on your earnings and any benefits you may be able to claim, such as Employment Support Allowance (ESA )(previously known as state incapacity benefit) and any other benefit you may receive from your employer or other insurance policies where benefits are being paid due to sickness or accident.

Bonuses are not normally added to traditional income protection policies and it is not possible to surrender the policy. If premiums stop, the policy will end and have no value. The policy does not normally pay out on death and will stop at a specific age, for example, an intended retirement age. The policy normally sets an upper age limit of 65.

The amount of benefit that the policy pays will generally be limited to between 50 to 75% of your pre-incapacity earnings. There may be an upper limit as to how much can be paid each year. These limits are set to provide an incentive to return to work when you have recovered. However, this will depend on the type of policy you have.

How the policy works

Premiums

Premiums may be selected to remain level throughout, in which case any benefit paid will normally also remain level, or premiums may increase by a fixed percentage (for example, 3% or 5% each year), or by a variable rate such as the Retail Price Index (RPI) or the National Average Earnings Index. Premiums would normally be paid monthly although other payment options are sometimes available.

Some policies are written as 5 or 10 year renewable policies where, at the end of each 5 or 10 year period, a new policy of the same type can be taken out without evidence of health. The premiums, however, will increase as you will be older. If you are incapacitated and in a deferred period at the renewal date, the deferred period does not have to start again on the new policy, but runs from the date of incapacity on the old policy. Similarly, if benefit is being paid when the old policy expires, it will continue under the new policy without having to go through a new deferred period.

Your policy may be a stand-alone policy or could be an additional benefit to another policy. 

Some policies may have regular reviews built in, to check whether the premium is set at a suitable level. Policies with reviewable premiums do tend to be cheaper initially, compared with policies where premiums are guaranteed throughout the life of the policy.

When will the payments start?

Deferred period

Benefit payments will normally begin after a ‘deferred period’ following incapacity. This can typically be 4, 13, 26 or 52 weeks. Premiums will be lower if a longer deferred period is chosen. The deferred period is selected at the start and will be chosen to coincide with the period for which salary payments will continue following incapacity. It may also take into account the period for which ESA or other benefits are payable.

Linked claims

If your incapacity starts again within 6 months of the end of an earlier claim, from the same or related condition, this will be a linked claim. In this case there will be no need for an additional deferred period.

What will the payments be?

Benefits

Payment of the benefit will normally be made monthly in arrears, commencing on the 1st of the month following the end of the deferred period.

Benefits may increase by an indexed rate (such as RPI), a fixed percentage or by a certain percentage chosen by you at the start of the policy.

Incapacity

The definition of incapacity will be different from policy to policy. This will depend on your choice at the application stage. The options may be limited by your occupation.

Incapacity will be defined as meaning being unable to follow:

  • your own occupation;
  • any occupation in which you are trained or experienced;
  • any occupation at all; or
  • being unable to undertake a number of Activities of daily work or Activities of daily living.

Incapacity will be defined on one of the following bases:

  • Own occupation – the policyholder is incapacitated if they are unable, following illness or accident to perform their own occupation and are not working in another job.
  • Suited occupation – the policyholder is incapacitated if they are unable, following illness or accident to perform an occupation suitable to them given their education and training.
  • Any occupation - the policyholder is incapacitated if they are unable, following illness or accident to perform any occupation at all.
  • Activities of daily work – the policyholder is incapacitated if they are unable, following illness or accident to perform a number of defined activities associated with work. The policy will define the number of activities and their definitions.
  • Activities of daily living (ADLs) - the policyholder is incapacitated if they are unable, following illness or accident to perform a number of defined activities such as dressing and undressing, washing, eating, climbing stairs, shopping, cooking and so on. The policy will define the number of activities and their definitions.

Rehabilitation benefit may be payable as a monthly income when you return to work, in either the original occupation or a new one, and you have a reduced income within 6 months of the return to work. The benefit is a proportion of the full benefit that was paid. For example, if 60% of the original income is being paid, 40% of the full benefit would be payable as the rehabilitation benefit. The rehabilitation benefit will end on death, expiry of the policy, a return to pre-incapacity earnings or after a pre-set period as defined in the policy.

An exclusion may be applied at the start of the policy whereby benefit payments will not be made if the incapacity is as a result of, or related to the exclusion. Blanket exclusions, such as breach of the law, self-inflicted injury or being under the influence of alcohol may also be applied to the policy.

Some policy providers will require that you let them know if you change your occupation as there may be a change to the amount of premium or the length of the deferred period for the new occupation.

Policies may apply different definitions at different times in your life. You should check your terms and conditions to see what applies to you or contact your policy provider.

When will the payments end?

The benefit will generally be payable until the earlier of the following:

  • death;
  • the policy ends;
  • you recover;
  • you start a new, perhaps less well paid, occupation or resume part of the old occupation; or
  • the benefit term finishes.
Limits, restrictions and taxation

Benefit limits

Benefits paid out will generally be between 50 to 75% of your earnings. There may be an upper limit on how much can be paid each year, to give an incentive to return to work when you have recovered.

When payments start, the benefit from the policy plus any other benefits, such as ESA and benefits from other policies, cannot exceed the percentage set by the policy of your average monthly income for the year, or longer period as defined, before the incapacity started.

During benefit payment, if you are able to follow another less well paid occupation, the benefit payment may make up the difference to your average monthly income before incapacity started. For example, if 60% of the original income is being paid, 40% of the full benefit would be payable. However, payments will stop once earnings reach the level they were at before incapacity.

Restrictions

  • The policy may only be valid while you are resident in the UK, EU or Western Europe, USA or other developed countries. However, holidays will be allowed.
  • The policy will not normally pay out where you are unemployed at the start of the period when incapacity occurs. Some policies, however, allow for a limited payment of some benefits on unemployment.
  • No benefits will be payable for accident or illness arising from drug or alcohol abuse, criminal acts, intentional self-harm, wars and pregnancy or an excluded cause applied to the policy at the start.

Taxation of the benefits

Benefits for income protection policies are tax-free.

Changing circumstances

It is important for you to check that the benefits payable and the deferred period continue to be appropriate for your current needs.

This is especially important if your employment or personal circumstances change.

Many people find that their level of benefits is not enough for their needs, so it is important that these are reviewed on a regular basis.

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Your retirement options

View our video to help you to understand the retirement options and help available to you