Short term income protection insurance
- 13TH JULY 2007
Short-term income payment protection insurance pays out a tax-free monthly income for up to an absolute maximum of 12 months if you are unable to work as a result of illness or injury. It is not linked to a specific debt, such as a mortgage or other loan, and the benefit payments you receive in the event of a claim can be spent on whatever you choose.
The cover is straightforward to understand because all policyholders pay the same flat rate, regardless of their age, gender, smoking habits or occupation. A further significant attraction is that it can be arranged instantly. Because short-term income protection insurers do not carry out individual medical underwriting at outset, there is no need to have to wait around for them to contact your GP or for you to undergo an independent medical examination.
How does it work?
At outset the policyholder can choose between having a maximum pay-out period in the event of a claim of either: three, six, nine or 12 months. The shorter the maximum pay-out period selected the lower the cost.
In most cases those who can afford to are likely to decide that it is worth paying to obtain the maximum 12 month pay-out option, but there are certain specific scenarios when the shorter-term pay-out periods may be appropriate.
For example, a nine month pay-out period can dovetail nicely with the state benefit system for homeowners, because those who have taken out mortgages since October 1995 do not receive any state help with mortgage repayments for the first nine months.
Similarly, those who have longer-term health cover via either an individual advisory income protection insurance policy or via a company-paid group income protection insurance scheme will normally not receive any benefit payments in the event of a claim until after the end of an initial exclusion period (known as the ‘deferred period’). Most deferred periods last either three or six months, so short-term income protection insurance with either a three or six month maximum pay-out period can be used to plug the gap.
Premiums, which are paid by direct debit, are determined by the length of maximum pay-out period selected, the flat rate quoted by the provider and
the amount of monthly cover chosen - which must be within a stated maximum limit.
The policy will pay out a monthly benefit, which will be backdated to day one, if the policyholder is unable to work for 30 consecutive days as a result of illness or injury. This benefit will continue until the policyholder is able to return to work or, if they fail to do so, until the end of the maximum pay-out period selected – either three, six, nine or 12 months.
You cannot make a claim without seeing your doctor and your period of incapacity will be considered to begin on the day on which our doctor confirms you cannot work. If, however, you complete your employer’s self-certification form for the first seven days of your absence, you will be classified as ill or injured for those seven days. At the end of each 30 day period during which you are off work you have to provide the insurers with a doctor’s certificate confirming that you are still unable to work.
The downsides
The primary drawback of short-term income protection insurance is that it is unable to make benefit payments for longer than 12 months, and this arguably fails to provide adequate peace of mind. Whilst many illnesses and injuries can last for less than this, there is always the danger of being unable to work for much longer or, indeed, ever again.
It is therefore well worth considering the much longer-term cover offered by both long-term income protection insurance, which can make benefit payments for up to 30 years, and by advisory income protection insurance, which can make benefit payments up until your intended retirement date.
Long-term income protection insurance will involve having to pay slightly more, and in some cases advisory income protection insurance will cost more as well – although, because this is individually underwritten, much will depend on factors such as your age, occupation and smoking habits. But with both products the extra premium may well be worth paying in view of the greater security being offered.
The fact that short-term income protection insurance premium rates are not actually guaranteed to remain unchanged throughout the lifetime of a policy is also far from ideal. There is nothing to stop the insurer from raising premiums for all policyholders if it decides that its overall claims experience is proving worse than it had originally anticipated. With advisory income protection insurance, on the other hand, many insurers offer the chance to obtain premium rates that are guaranteed to remain fixed throughout the policy term, thereby enabling policyholders to plan with absolute certainty.
It is also important to be aware that short-term income protection insurance will not pay out in every eventuality, because its policy wording includes a number of exclusion clauses.
Of particular importance is the fact that medical conditions that existed prior to the start of cover (so-called ‘pre-existing conditions’) are not covered, although this exclusion is waived if you have not suffered from the condition in question for two years before the first date on which you became unable to work.
It is no good hoping that any such pre-existing conditions will not be detected by the insurer just because it doesn’t require policyholders to go through a medical underwriting process at outset. In the event of a claim it will write to your GP and it is at this stage that any pre-existing conditions will come to light.
The following are also excluded:
*Any conditions you knew about or should have reasonably known about at the
policy start date.
*Self-inflicted injuries, including the effects of alcohol and drug abuse.
*Back pain that is not confirmed by appropriate medical documents.
Who needs it?
Unfortunately ill health can strike absolutely anyone like a bolt out of the blue and can ruin even the most meticulously planned careers. Furthermore, we are not just talking about life threatening illnesses like heart attacks and cancers.
Back pain, which currently affects more than one in three of us, has become an increasingly alarming source of absenteeism in the workplace, as have depression and chronic anxiety, from which almost one sixth of the adult population is currently suffering. Obviously, not all of these cases are severe enough to warrant being signed off work by a doctor and to result in a claim on a short-term income protection policy, but once the underlying condition exists there is always the danger of a major deterioration occurring.
A minority of people in very good jobs may have extremely generous short-term sick pay arrangements, such as full pay for six months followed by half pay for a further six months. If so, they may consider that no further insurance against being unable to work is necessary. Similarly a fortunate few may feel they can rely on wealthy partners or parents to support them during a period of incapacity.
Most people who fail to take out suitable insurance, however, will find themselves
having to rely on the state benefit system if they are too ill to work for any length of time, and this is not nearly as generous as widely imagined.
State benefit entitlements are worked out on a case by case basis and take into account factors such as your age, savings levels, the number of dependants that you have and your housing situation. But whatever the amount you receive, you can be certain that it will not enable you to do more than pay for very basic necessities.
It will not take long for any savings you have managed to tuck away to become depleted and you could find yourself up to the eyeballs in debt just through trying to meet the everyday costs of living. If you also have to meet one-off expenses like paying for a new car or for repairs to the home the situation could spiral out of control and you could even end up at the bankruptcy courts.
Not everyone’s budget can stretch to the greater premium costs of long-term income protection, even though most would prefer the greater security it offers.
Additionally, a small proportion of those who apply for long-term income protection insurance will be turned down on the basis of their answers to a brief questionnaire - but they will still be eligible for short-term income protection insurance, which does not have a medical questionnaire.
Such individuals may well decide that it is better to have cover that only pays out for up to a maximum 12 months than to have none at all. At least those who have the misfortune to develop longer-term health problems will get a valuable breathing space which will enable them to plan the way forward and consider whether any future help might be forthcoming from other sources, such as family members or possibly even charities.
