When recommending an income protection plan, there are many factors that need to be understood in order to select the right level of benefit. The clients’ expenditure is clearly critically important as this ultimately is what is being protected however, in many cases (particularly where expenditure is high compared to income) the maximum sum assured an insurer will offer dictates the level of cover. In this week’s insight we consider the maximum level of benefit insurers offer their income protection clients and what other forms of income may reduce the amount they pay at point of claim.
When looking at the maximum level of benefit a client can achieve there are two factors to consider: the maximum benefit the insurer will offer overall and the maximum amount of a clients’ income they will cover.
In terms of the maximum benefit insurers will offer is varied especially when comparing different insurers and product types. As the chart below highlights, the levels are relatively high and will only be a consideration for the highest earning clients. The exceptions to this are the more specialist products from Aviva (Living Costs), Holloway Friendly and LV= (Personal Sick Pay).
*Holloway Friendly offer the same limits across all their products.
Whilst only high earners will be affected by the maximum benefit an insurer will offer, the maximum amount of a clients’ income an insurer will cover is far more relevant to the masses. There are range of approaches to how an insurer will calculate this with some offering a flat percentage of the client’s income and others taking a tiered approach where they will pay different percentages, which will decrease the larger the clients’ income becomes.
All insurers other than Zurich calculate the client’s income protection benefit using their Gross income. Zurich on the other hand, calculate the benefit using their take home salary (Net Income).
Due to the differing approaches it is difficult to understand which insurer may offer a client a higher benefit. Fortunately for advisers, quotation portals have a feature where if the benefit amount requested is above the maximum an insurer will offer, they will show the highest benefit amount they are able to offer. Whilst this is useful, advisers should be careful to check the benefit levels of the product selected to ensure that this will not leave the client at risk of not being able to meet their vital expenditure.
The below graph shows the maximum benefit amount each insurer will offer for clients earning £30,000, £60,000 and £120,000.
Notably, Aviva (Living Costs) does not take in to account the client’s earnings and allows them to choose a monthly benefit between £500 – £1500. The client only needs to prove they have been working for at least 16 hours a week immediately before they become incapacitated.
The following table explains how to calculate the monthly income protection benefit (using AIG’s approach as an example):
It is also worth taking note, that if the client is in receipt of other sources of income at point of claim, deductions may apply. As is normally the case, the deductions made will vary from provider to provider. The table below details which sources of income each provider will deduct from the benefit amount.
What other income will reduce the maximum benefit available?
*This reflects all Holloway Friendly products.
It is worth mentioning that insurers generally will not take rental income into account under income from other investments unless the clients’ main occupation was buying and renting properties.
Whilst not all of these types of income will be relevant to many clients, it does highlight the importance of completing a full fact find process which captures other forms of income and particularly fully understanding the clients’ sick pay arrangements with their current employer (if employed). It also highlights the need to continuously monitor the clients’ income via reviews as clients could end up paying for a level of cover that they are not necessarily going to receive.
With the cost of living continuing to increase year on year, it is imperative that clients are continually reviewed to ensure that their income protection remains adequate. Overall, The Exeter, Royal London, LV=, Legal & General and AEGON offer high maximum sums inured compared to income. The Living Costs plan from Aviva is also to be commended as it does not take into account the income a client is in receipt of at point of claim and therefore there are no reductions for other forms of income.