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Chartered Insurance Institute
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Protection insurance

This article was last updated by the author in October 2016.

A brief introduction to protection insurance.

Contents

Overview

There are a number of types of protection insurance including:

  • Long-term care
  • Income protection
  • Critical illness
  • Creditor insurance

Each offers distinctly different cover and is usually issued as a separate stand-alone policy. 

Typical cover provided

Long term care  

Long term care insurance provides financial support if care is needed by the insured. It can cover the cost of assistance for those who need help to perform the basic activities of daily life such as getting out of bed, dressing, washing and going to the toilet (called Activities of Daily Living).

The care needed may be provided in the insured's own home or in residential or nursing homes. 

There are several types of long term care plans, including:

  • immediate needs annuities, which pay a guaranteed income for life to help cover the cost of care fees in exchange for a one-off lump sum payment, if the insured needs immediate care
  • pre-funded care plans, which give the insured the option of insuring future care needs before they develop (these plans are no longer available to purchase)
  • enhanced annuities, which use the insured's pension to buy an enhanced annuity if the insured has a health problem, a long-term illness, is overweight or smokes. The annuity provider uses full medical underwriting to get a more accurate individual price. People with medical conditions including Parkinson's disease and multiple sclerosis, or those who have had a major organ transplant are likely to be eligible for an enhanced annuity
  • equity release plans, which give the insured the ability to get a cash lump sum as a loan secured on their home. They can be used to fund a care plan now, or in the near future

Income protection

Income protection policies are designed to replace lost income for an individual who, due to illness or accident, is unable to work for more than a specified time.

There are 2 types of policy:

  • short-term income protection policies are designed to provide payments should the insured be unable to work for a set period of time; usually between 6 and 12 months
  • long-term income protection insurance can provide cover if the insured becomes so ill that they are unlikely to be able to work again

The key features of cover include:

  • payments are made until the insured can start working again, or in the case of long term policies, until retirement, death or the end of the policy term - whichever is sooner
  • cover is subject to a waiting period before the payments can start. This is usually set so that payments start after sick pay ends, or after any other insurance stops covering the insured
  • the maximum amount of income that can be covered is around 70% of gross monthly earnings. Any payments are normally tax free
  • most illnesses that would leave the insured unable to work, either in the short or long term, are covered
  • the insured can claim as many times as is needed whilst the policy lasts

Critical illness

Critical illness cover is offered as a stand-alone policy, but can also be incorporated into a whole life, term or endowment policy.

It provides a lump sum payment in the event of the insured being diagnosed with one or more of a defined range if serious illnesses. The illness covered are specified in the policy wording, but typically include:

  • heart attack
  • stroke
  • cancer
  • surgery for coronary artery disease
  • major organ transplant
  • kidney failure

Other conditions may also be covered such as multiple sclerosis, paralysis and blindness.

There are two types of critical illness policy:

  • fixed policies, where the premium paid is the same amount every month. Whilst this can be more expensive in the short-term, it allows the insured to know what they'll be paying in future
  • reviewable policies where the monthly payments are reviewed after a period of time; typically every five years. For these types of policy initial premiums tend to be lower, but can rise over time taking in account the insured's age and medical advances

Other features of critical illness cover include:

  • payment is made regardless of whether the illness prevents the insured from working
  • the policy wording will specify how serious a condition needs to be for payment to be made
  • some insurers will make partial payments for less severe conditions
  • lump sum payments are tax free
  • policies only pay out once and then come to an end

Creditor

This provides cover for the regular repayments due under, for example, a mortgage, bank loan or credit card, in the event of unemployment, accident or sickness. It is also known as payment protection, mortgage protection and consumer credit insurance.

There are many types of creditor insurance and cover can vary significantly between policies.

Cover is provided under two main sections:

  • Unemployment and accident and sickness cover, which pays a monthly benefit if the insured becomes unemployed or is prevented from working due to accident or illness. There is usually a waiting period, which may take the form of either an excess or a franchise depending on the insurer. In the event of the permanent total disablement of the insured, the policy will pay the outstanding balance of the loan or credit card
  • Life cover. In the event of the insured's death the policy will pay the outstanding balance of the loan or credit card at the date of death.

Limits apply to each section of cover.

Optional extensions

Long-term care

The extensions available vary depending on the care plan selected and include:

  • immediate needs annuities:
    • capital protection; allows the insured's family to get some of the lump sum payment back if the insured were to die early
    • a deferred option; allows the insured to choose to defer receiving income from the plan until a later date

Income protection

Typical extensions to cover include:

  • inflation linked policies
  • protection of benefits in kind, such as a company car or private health insurance
  • waiver of premiums
  • terminal illness cover
  • death benefit

Critical illness

Typical extensions to cover include:

  • unit linking
  • death benefit

Creditor

A number of optional extensions are available, including:

  • Critical illness. In the event of the insured being diagnosed with, or dying from, a critical illness, the policy will pay the outstanding balance of the loan or credit card
  • Carer cover. In the event of the insured becoming a carer, the policy will pay the outstanding balance of the loan or credit card
  • Hospitalisation. If the insured has to stay in hospital for more than a defined period, the policy pays a set amount per day.

Key exclusions

Long-term care

As long term care plans are a specialised of either an annuity or mortgage, there are no 'policy exclusions' once the plan is up and running.

Income protection

Typical exclusions include:

  • pre-existing medical conditions
  • disabilities or illnesses as a result of a criminal act
  • self-inflicted injuries
  • pregnancy
  • alcohol or drug abuse

Critical illness

Certain serious conditions are usually excluded from cover, such as:

  • some cancers, such as non-invasive cancers
  • health problems which the insured knew about before taking out insurance
  • some critical injuries such as broken bones

Creditor

Typical exclusions include:

  • unemployment which was known about at the start of the policy or occurring within a specified period of taking out the policy
  • deliberate acts, wilful actions, self-inflicted injury, drugs or alcohol abuse
  • unemployment brought about by the insured choosing to resign or take early retirement or voluntary redundancy
  • war or similar risks
  • normal pregnancy or childbirth
  • pre-existing medical conditions, unless the customer has been symptom free for 24 months before the claim
  • HIV or AIDS
  • seasonal or fixed-term employment
  • claims occurring within the waiting period
  • dismissal due to misconduct, voluntary redundancy or retirement.

In addition, some policies may also exclude some or all of the following:

  • back conditions;
  • mental health conditions;
  • chronic conditions

Rating factors

The main rating factors are:

Long-term care

The cost of long term care insurance will vary depending on the product selected:

  • immediate needs annuities. The upfront cost will depend on the level of income needed; the insured's age, state of your health and life expectancy; current annuity rates
  • equity release. Apart from mortgage payments based on the amount and term of the loan, there may be additional charges, such as an arrangement fee to the mortgage lender; legal fees; a valuation fee; buildings insurance; and a completion fee

Income protection

The cost of a policy reflects a number of factors, including: age; whether the insured smokes or has previously smoked; health (including weight and family medical history); occupation; the waiting period; and the percentage of income covered.

Critical illness

The key rating factors are age; whether the insured is a smoker or has previously smoked; alcohol consumption; health (including weight and family medical history); occupation; and the amount of cover. Premiums are usually paid monthly

Creditor

To qualify for cover applicants must meet certain eligibility criteria, which typically require that the applicant:

  • is aged between 18 and 64 years (or sometimes 70 years)
  • lives and works in the UK
  • is employed for 16 hours per week or more
  • is employed on a long-term contract or has been self-employed for a specified period of time
  • is unaware of any pending change in their employment circumstances.

If the applicant is acceptable for cover the premium will then depend on:

  • the amount of credit
  • the term of the loan, and
  • the type of credit.

Premiums are charged either monthly or annually. A premium rate per £100 of benefit is charged on the outstanding balance or loan amount    

Product providers

Long term care insurance is a specialist area where the plan needs to be tailored to the individual needs on each insured. Cover is usually arranged on the advice of a financial adviser who is qualified in this area. The provider will depend on the product selected.

There are a number of providers of income protection and critical illness cover from whom cover can be purchased directly by phone or over the internet. However, the purchase of these types of policy should form part of an individual's overall financial planning. Many people, therefore, arrange cover through an independent financial adviser. There are also brokers who specialise in high-risk applicants; for example, for those who have been turned down for insurance because of their medical history or occupation. 

The main providers of payment protection insurance used to be high street banks. However, in the wake of the mis-selling scandal most no longer offer cover. Although the market place is smaller, cover continues to be freely available from a number of other providers, either on line or over the telephone.  

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