Here at income protection expert we are great believers in and advocates of income protection but it is a complex topic and if you are not careful it is possible to take out a policy that could potentially give you a few nasty surprises in the event of a claim. The information below is designed to highlight the potential pitfalls that exist and help you ask the right questions when talking to an adviser.
Short term own occupation cover
Own occupation cover certainly provides the most comprehensive protection and it always our preference. You need to be aware though that some income protection providers offer own occupation cover ONLY for the first year of claim, after which it reverts to a different definition which would be more difficult to claim on, which could mean that your payments would stop.
Certain income protection policies have clauses built in to the terms and conditions which mean that in the event of a claim, after 12 months of payments the benefit amount is reduced by 50% even though you have applied for a policy with the full amount of cover.
deductions Some income protection providers will deduct the amount of state benefits that you receive from the amount of cover that you have taken out, if that benefit takes you over the maximum amount of cover that they allow, before they pay you each month. This deduction is sometimes only applied after a claim has been paid for more than 12 months.
Occupation definition - Manual Workers
As mentioned in detail in the section on Occupation Definition, there is only one type that is guaranteed to pay out if an accident or illness means that you cannot do their normal daily duties of your job and it is the OWN OCCUPATION DEFINITION. We strongly believe that this is the only type of cover that you should take out, if it is available.
If you are in an occupation that involves a significant amount of manual work then it becomes more difficult to find an income protection policy that offers full term own occupation cover, though this may not be easy to determine when searching on-line.
A particular problem is that some Income Protection providers offer policies that are own occupation for a short period after making a claim but then change to a weaker definition, so the payments may stop under the tougher definition.
The main software systems used by Insurance Brokers / IFA’s to research policy premiums, Webline, Lifequote, Assureweb and Iress do not differentiate on this factor so this type of policy will be labelled as Own Occupation in the search results and may be offered by non-expert brokers / advisers, so always speak to an expert.
The other occupation definitions are shown below and we do suggest that they are best avoided.
- Suited occupation
- Any occupation
- Work tasks
- Activities of daily living
Please see the Jargon Buster for the details on the above definitions.
Some policies from certain providers contain standard exclusions, which invalidate claims if they are caused by a certain events, such as Criminal acts, Unreasonably not following medical advice, HIV / AIDS, war, rebellion, riot, terrorism or anything similar and Living outside stated geographical limits, which for the vast majority of insurance companies means outside of the UK. Standard exclusions vary depending on the insurance provider and some insurance companies do not have any standard exclusions at all, two choice of insurer is very important in this regard.
In the event of a claim being made, you will normally be required to provide documentary evidence of your CURRENT income level. This can result in you being unable to claim for the full amount of the cover that you have been paying your monthly premiums for and this can be caused both by errors in setting up the policy or events after the policy has started and common reasons are shown below.
- Your income level has fallen since you took out the policy
- Annual benefit indexation increases takes your cover over the allowable percentage limit.
- Total cover with a second policy exceeds the percentage or absolute limits.
State benefits take you over the maximum allowable percentage of your income.
When possible, it is suggested to take out an income protection policy with guaranteed premiums but there are occupation types where that may not be available, particularly with the preferable, Own Occupation definition of cover. This is often the case with manual trades such as building workers.
Reviewable premiums can increase and are normally reviewed every 5 years, with any rise depending upon the insurer claims history but most reputable insurers typically have modest increases for this type of premium.
Age costed premiums, sometimes known as escalating premiums are often exceptional value for younger people and it is common for prices to be fixed up until the age of 30. However, as suggested by the name, premiums normally increase each year, fairly modestly at the lower end of the age spectrum but increasing more significantly as age goes up, with quite hefty rises the norm each year through the 50’s age range. Despite this, age costed policies are commonly cheaper overall for manual trades
Indexation Increase Methods
This is the formula used on the premium when applying an indexation rise to the cover amount.
The impact of the different methods cannot be overstated when index linked policies are taken out. The simplest way to illustrate this is graphically and the chart below shows the impact with a 3.0% inflation increase in the amount of cover over a long term policy over 39 years, with a starting premium of £30/month.
Note – Defaqto do not give significant weight to this element and will award 5 stars to policies that could increase dramatically compared to the 1:1 method.
We believe that any factor that could lead to a premium being 3 x higher by the end of the term compared to one using the 1:1 method is an extremely important factor, and our ranking system does take this issue into account.