Long term income protection insurance
- 13TH JULY 2007
Those wishing to ensure that they receive a reasonable income if they are unable to work as a result of ill health have traditionally had two basic choices, both of which have their advantages and disadvantages.
Someone prepared to wait to be individually underwritten at outset can secure long-term health cover by taking out ‘advisory income protection insurance’. Because this is a highly complex product with many different providers to choose between, it should be considered in conjunction with objective professional advice – hence its title.
An expert adviser can help you select the most suitable policy from the major specialist providers. They will look well beyond mere headline pricing, paying due attention to how policies vary in small print details that can have a significant impact on overall value.
Alternatively those in search of a quick fix can take out ‘short-term income protection insurance’, which only pays out for an absolute maximum of one year at the claims stage but which can be arranged instantly and is straightforward enough to understand to preclude the need for advice.
Now, however, there is also a third choice known as ‘long-term income protection
insurance’. This aims to combine the best of both the advisory income protection insurance and short-term income protection insurance worlds.
How does it work?
Like short-term income protection insurance, long-term income protection insurance charges all policyholders the same flat rate, regardless of their age, gender, smoking habits or medical history. But, unlike short-term income protection insurance, it can pay out claims benefit for up to 30 years.
The monthly premium for long-term income protection insurance, which is paid by direct debit, is determined by the flat rate offered by the provider and by the level of cover chosen – within stated limits – by the policyholder. Monthly claims benefit payments, which are tax-free and can be spent on anything that the policyholder wishes, begin as soon as the policyholder is unable to work for 30 consecutive days as a result of an illness or injury, and they backdate until day one. Benefit payments continue until the claimant is able to return
to work or, if they never recover, up until their 60th birthday or until the policy has been in force for 30 years – whichever is sooner.
Although it costs slightly more, long-term income protection insurance is likely to be considered to offer better value than short-term income protection insurance for those who can afford it, because it is quite possible for an accident or illness to keep someone off work for much longer than a year. Indeed, it could leave them permanently unable to work. A short-term income protection insurance policyholder could therefore be left without benefit
payments for decades once their maximum pay-out period has expired.
Nevertheless, a small minority of applicants will not be accepted for long-term income protection insurance on the basis of their answers to a brief medical questionnaire. This may seem harsh, but underwriters need to remove the very worst risks in order to ensure that cover remains affordable for the vast majority of others who are accepted.
At least this selection decision will be immediate, meaning that the few who find themselves ineligible for cover will have time to consider other options. They should still be eligible for short-term income protection insurance, which does not require the completion of a medical questionnaire, and having cover that only pays out for a year may be considered preferable to having none at all.
The advisory income protection insurance alternative
But the decision between long-term income payment protection insurance and advisory income
protection insurance, which can make claims benefit payments until you are 65 or - in some cases – 70, can be much more finely balanced.
Advisory income protection insurance does not quote a single flat rate and underwrites each applicant individually, paying attention to factors such as their age, gender, smoking habits, medical history and – most importantly of all - occupation. This can make it better value for many individuals than long-term income protection insurance but poorer value for others.
The fact that advisory income protection insurance tends to take longer to arrange can also be a major consideration. Unlike with long-term income protection insurance, the insurer may decide to write to the applicant’s GP or may even require them to undergo an independent medical examination with a doctor in their area. This could easily mean that someone has to wait several weeks for their policy to come into force and it could also result in them eventually being quoted terms that were wildly different from those initially indicated.
The ‘one-size-fits-all’ approach taken by long-term income protection insurance makes it far simpler to understand, avoiding the need to indulge in complex product comparisons or to seek professional advice. The fact that it provides cover from day one is also a major attraction, because most advisory income protection insurance policies do not pay out benefit until the end of an initial deferred period, which commonly lasts three or six months.
Pre-existing medical conditions
To varying degrees, all three types of income protection insurance exclude medical conditions that existed prior to the start of the policy (so-called ‘pre-existing conditions’), but the stance taken by long-term income protection insurance in this respect is unusually consumer friendly. It only excludes illnesses and injuries that have been present within 36 months of the start date. Everything else is covered.
This can therefore be a very attractive format to those who have suffered from conditions that can recur after many years. Back pain and stress related disorders are obvious examples, although it is important to realise that claims are only valid for these particular conditions if a consultant certifies that they are serious enough to prevent you from working.
In comparison, advisory income protection insurers usually issue permanent exclusions for the more significant pre-existing conditions and spell these out at the outset of the policy.
Short-term income protection insurance, on the other hand, tends to exclude all pre-existing conditions, but waives this exclusion if the policyholder hasn’t suffered from the condition concerned for two years prior to the first date on which they became unable to work.
Disclosure
With long-term income protection insurance, and indeed all types of income protection insurance, the importance of providing the insurer with accurate information at outset cannotbe stressed highly enough, because failure to do so could result in you not getting paid in the event of a claim.
Even though the insurer will not write to your GP at outset, it will do so if you make a claim and will therefore find out if you have failed to complete your medical questionnaire honestly. At this stage it will also discover whether the condition you are claiming for is excluded on the grounds of being a pre-existing condition – because you have received treatment or medical advice for it during the 36 months prior to starting your policy.
Other exclusions
Other important exclusions to be aware of on long--term income protection insurance policies include:
*Claims you knew you were going to make at the outset of the policy.
• Self-inflicted injury, including the effects of drug abuse and alcoholism.
• Disability that occurs whilst you are working outside the UK.
• Pregnancy and childbirth.
Who needs long-term income protection insurance?
Anyone who underestimates how difficult it is likely to be to survive without a reasonable regular income potentially does so at their peril, because the state benefits available to those who are too ill to work are not as generous as widely imagined.
Exactly what you will receive from the state will depend on a range of factors, such as your age, savings levels, the number of dependents that you have and whether you are a home owner or live in rented accommodation. But you can be sure that surviving on whatever you are given will be a struggle. Even having to pay for something as mundane as a long-distance train or coach journey to visit family or friends is likely to amount to a financial crisis.
Unfortunately, no-one is immune to the threat of ill-health, regardless of how much attention they pay to diet and exercise, so in most cases some form of private insurance is likely to be advisable. It is, however, first worth checking with your HR department whether you are already a member of an employer-paid income protection insurance scheme at work.
If you are, you may already enjoy adequate protection against long-term sickness and disability.
If you don’t have any such cover via the workplace and are not one of the fortunate few to have a partner or family member wealthy and wiling enough to support you if you are incapacitated, you are likely to conclude that you can’t afford to be without some form of individual income protection insurance.
As long as you can afford the higher premium and are accepted for cover, long-term income protection insurance is likely to appear better value than short-term income protection insurance, but whether it offers better value than advisory income protection insurance will depend largely on your individual circumstances and on the length of time that you can afford to wait before the policy comes into
