Selecting the right deferred period is one of the most important considerations when recommending an income protection plan. Insurers offer a range of different options to meet client needs, however the COVID-19 pandemic has led to some insurers making changes and removing shorter deferred period options or applying exclusions. In this article we assess what deferred periods are still available and highlight what has changed due to coronavirus.
Understanding the client’s financial resilience when unable to work is key to determining the right deferred period. Shorter deferred periods will cost more than those with longer deferred periods so understanding the clients budget alongside their ability to support themselves if unable to work is vital. Where a client is employed, advisers should consider a client’s sick pay arrangements through their employer and any savings they may have in order to determine how long they are able to cope financially before an income protection benefit can start. Where a client is self employed this becomes slightly more tricky as advisers will need to understand how long the client might be in receipt of income if unable to work as well as any savings they may have to support themselves in the short term.
Insurers will generally pay benefits monthly in arrears. This means that if a three-month deferred period has been selected, the client will not receive the first payment until four months have elapsed. Whilst this will usually align with how an employee might receive their salary if paid monthly, this can cause problems where a client is paid weekly. Advisers should be aware that there may be a shortfall in their client’s income for a number of weeks and make plans accordingly.
The most common deferred periods offered are 4 week, 8 week, 13 week, 26 week and 52 weeks. Although these deferred periods have remained largely unaffected by coronavirus some insurers have removed or applied exclusions to their 4 and 8 week deferred periods.
*Cirencester have temporarily suspended offering 4 week deferred periods on all policies
**Holloway Friendly have temporarily suspended offering 4 week deferred periods on all policies
***Vitality have temporarily suspended offering 4 and 8 week deferred periods on all policies
The deferred period can become a more important factor when you consider those that have no sick pay arrangements via their employer or self-employed people, such as tradesmen, where their income is likely to cease from day one if they are unable to work. In such circumstances one day or one week deferred periods could be considered. These shorter deferred periods have been most affected by coronavirus with only two insurers continuing offer such terms.
*British Friendly have temporarily suspended offering 1 day and 1 week deferred periods
**Cirencester have temporarily suspended offering 1 day and 1 week deferred periods
***Holloway Friendly have temporarily suspended offering 1 week deferred periods
****Legal & General have temporarily suspended offering 2 week deferred periods
*****LV= have temporarily suspended offering 1 day and 1 week deferred periods under Personal Sick Pay
******The Exeter will apply a 12 month coronavirus exclusion for 1 day and 1 week deferred periods
*******Vitality have temporarily suspended offering 1 week deferred period options
Where income protection is recommended, regular reviews should be carried out to ensure that the level of benefits and deferred period remain suitable. This is especially relevant if a client’s employment changes. This is also particularly important where advisers are unable to obtain a plan on the correct deferred period due to temporary changes to plans. It is our expectation that once the current pandemic is over, insurers will reinstate shorter deferred period options at which point it may be prudent to re-assess your clients’ position.
Many employers require employees to complete an initial qualifying period before they offer sick pay benefits. If a client falls ill during this period they are likely to find themselves under-insured as they will be without pay during their deferred period and advisers should make their clients aware of such risks.
Matching the deferred period of an income protection plan to a client’s specific needs can in some cases be a complex task and this has not been made any easier by the COVID-19 pandemic. If done correctly it can give the client the comfort that they will be able to pay their bills if they become ill and are unable to work. Encouragingly there are still plenty of options available for advisers with short deferred periods still available, however advisers should ensure that their clients are clear about any limitations to claims such as coronavirus exclusions.