Income Protection Insurance Explained

04 August 2016

There are various types of income protection insurance available to employees in England & Wales.

Permanent Health Insurance or long-term income protection is an insurance policy that provides an employee unable to work due to injury or long-term sickness with the benefit of income. This type of policy pays out until a fixed age, death or your return to work.

Short Term Income Protection typically has a fixed maximum payout period of 1-5 years and may be limited to cover redundancy and unemployment.

Some employers will provide a group policy for its employees so that staff receive a proportion of their salary in the event that they meet the policy criteria. Some employers use this as a tool for recruitment and retention as it can help to financially support employees through what can be a financially and emotionally stressful time. It is often cheaper to buy cover this way rather than purchasing an individual policy direct from an insurer.

According to research by Unum and Personnel Today, only 12% of employers support their employees for more than 1 year if they are off work sick. With the risk of a post-Brexit recession and limited state benefits that are subject to difficult qualification criteria, there is an enhanced need for employees to have income protection insurance.

Income protection insurance should not be confused with the widely mis-sold payment protection insurance (PPI) which cover a particular debt with payouts going to the lender. Income protection insurance gives you a tax-free percentage of your income if you are unable to work due to illness, injury or redundancy.

Income Protection Insurance Checklist for Employees

It is important to read the small print of your income protection policy so you know precisely the types of situations that are likely to be covered by your policy.

  1. Check the insurance policy definition of ‘incapacity’ as this can vary from policy to policy. You should check if the policy kicks in when you are unable to work in ‘any’ occupation or whether it is limited to your ‘normal’ occupation or a ‘suitable’ occupation studied by your training and education (i.e. you accepted a job that is similar to your current role but less physically demanding). Avoid policies that cover ‘activities of daily living’ or ‘activities of daily working’ as these policies often won’t pay out unless you can’t do simple tasks such as holding a pencil or dressing yourself.
  2. When applying for a private individual policy make sure that you reveal all of your health issues. Insurers can reject a claim if they discover that you had a pre-existing health condition you didn’t previously flag up, no matter how small it seems. Remember that it is always better to disclose too much information than risk a rejected claim later.
  3. Check if the premiums are guaranteed throughout the policy, linked to age or inflation or reviewable.
  4. Check what practical ‘back to work’ help you may be entitled to in the event of a claim such as counselling and rehabilitation.
  5. What is the ‘deferment’ period? This is the period of absence due to incapacity for which the Permanent Health Insurance payment is deferred. This varies depending on the policy – it is not unusual to see a deferment period of 6 months in a policy. Sometimes, the deferment period can be tied to your employer’s own contractual sick pay period.
  6. What is the period of cover? Is it for a fixed-term e.g. 2 years or 5 years or until you are 65. How often is medical assessment required during that period?
  7. What steps need to be taken before insurance cover is accepted? Do you have to declare pre-existing conditions, are specific illnesses excluded and what is the position on medical examinations and reports (is the insurer or employer or employee responsible for obtaining a medical report?).
  8. Do you have to remain an employee whilst receiving benefits under the policy? Some policies stipulate that benefits accrue to individuals even after their employment ends (this can be costly).
  9. If you have a contractual entitlement to Permanent Health Insurance benefit then your employer may be under an implied duty to take ‘all reasonable steps’ to seek to procure the benefits of the policy for you. This principle derives from the overarching implied duty of trust and confidence. In some circumstances, litigation by the employer (on behalf of the employee) against the insurer may be deemed to be a reasonable step depending on the strength of the employee’s case. Don’t forget that you can complain to the Financial Ombudsman about the insurer if it refuses to pay your claim (your employer may offer to support your legal fees although there is no requirement to have legal representation).
  10. If you can’t obtain Permanent Health Insurance due to your employer's failure to comply with the policy, your employer will be liable to you in damages for breach of contract.
  11. If you are eligible to make a Permanent Health Insurance claim or you are already in receipt of Permanent Health Insurance can your employer lawfully terminate your employment? There is an implied term in your contract of employment that your contract should not be terminated when you are incapacitated and could qualify for Permanent Health Insurance benefits. However, if your employer has reserved in your contract of employment the express contractual right to dismiss in the event of long-term incapacity then this may amount to a fair dismissal. Furthermore, you can still be fairly dismissed for gross misconduct even if that would deprive you of Permanent Health Insurance benefits. In addition, an employer can dismiss for redundancy provided that the reason isn’t connected with the illness and isn’t a repudiatory breach.
  12. Don’t forget that holiday accrues and can be taken during periods of absence covered by Permanent Health Insurance.
  13. Don’t over-insure. Total payouts will be restricted if you have two income protection policies. Some policies may deduct state benefits from your payout.
  14. Take independent financial advice when buying income protection cover as protection insurance can be complicated and receipt of income protection benefits can impact on state benefits.
  15. Once you’ve bought an income protection policy ensure that you have regular reviews. You may want to increase your cover as your income rises each year. Check whether your policy includes an indexation option.

Does an income protection insurance policy also cover legal expenses? Most income protection policies do not have a legal expenses cover option. Legal Expenses Insurance provides valuable protection to employees with potential employment claims. Legal expenses insurance can also cover other claims e.g. cases where you have entered into a contract for the purchase of goods or services, property disputes and personal injury.

Legal Expenses Insurance Checklist for Employees

  1. Does your legal expenses insurance policy cover Employment Tribunal and/or Court fees? These costs alone can potentially exceed £1,000.
  2. Be careful not to over-insure. It is worth checking your home insurance to see whether you have legal expenses cover as part of that policy. Sometimes it can be included with your home insurance for free or as an option for small premium. If you are a member of some professional bodies or motoring organisations or a trade union you may be entitled to free legal advice. If you do not have legal expenses insurance cover as part of your home insurance then you should consider purchasing standalone legal expenses insurance cover.
  3. Check the policy limit for your legal expenses insurance cover – it is usually £50,000 or £100,000.
  4. Will your claim be successful? Insurers typically require that there is a reasonable or better than average chance of your claim being successful (at least 51% prospects of success) before they will take it on. Even if your claim is accepted when your claim is first raised if new evidence comes to light later then funding for legal representation could be dropped.
  5. Size of claim – some insurers will not take on your claim where the value of your claim is less than the costs of pursuing your claim.
  6. Time limit – there is often a time limit for making a claim. Check your policy for details.
  7. Settlement offers – usually you must accept any reasonable offer to settle. If you choose to continue with your claim against legal advice then you may be responsible for any subsequent costs.
  8. Don’t forget alternatives to legal expenses insurance funding such as after the event insurance, savings and trade union membership.

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