Benefits of Income Protection Insurance

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Benefits of Income Protection Insurance

Income Protection Insurance (IPI) is a UK insurance policy 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 (PHI).

Incapacity will be defined on one of the following four 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 etc.

Any occupation- The policyholder is incapacitated if they are unable, following illness or accident to perform any occupation at all.

Activities of daily living (ADLs)- The policyholder is incapacitated if they are unable, following illness or accident to perform a number of defined functions such as dressing and undressing, washing, eating, climbing stairs, shopping, cooking etc. The policy will define the number of functions and their definitions.

Benefit limits nearly all policies limit the benefit payable to some percentage of the policyholder's normal earnings. The limit is usually around 70% of gross earnings, but could be less for high earners. Any state benefits payable may reduce the maximum benefit and benefits from any other policies may also reduce the maximum.

Deferred period the deferred period is the time between a valid claim and the commencement of benefit payments. The deferred period chosen has a significant influence on the cost of a policy.

Proportionate benefit to encourage the return to work of a policyholder recovering their health, many life offices offer to pay a reduced benefit if the policyholder takes a part time or lower-paid job after recovering their health.

Free limit the IPI policy will be only be valid while the policyholder is permanently resident in the area defined in the policy. The area will be at least the UK, probably the EU or Western Europe and could include the USA and other developed countries. Most policies will allow holidays and temporary residences outside of these areas.

IPI policies offer a number of benefits in comparison to other insurance policies such as accident, sickness and unemployment insurance or personal accident and sickness. Benefits are payable when the policyholder becomes incapacitated and after the deferred period has passed and continue until the earliest of death, recovery of health, retirement or the term of the contract.

Benefits are paid regularly (usually weekly or monthly) and are free of tax.The insurance company cannot cancel or refuse to renew the policy provided that the policyholder continues to pay the premiums.
A waiver of premium option may be provided whereby premiums for the IPI policy are not required while benefits are being paid from the policy, but the policy cover continues as normal.