Which income protection plans pay a lump sum on death?
In reading this article you will understand:
- Which providers offer a lump sum death benefit on their income protection plans
- How each provider calculates the funeral benefits
- Through examples, how much each provider would pay at different benefit levels
Income protection is not designed to provide a payout on death, as its purpose is to protect clients’ income rather than their lives. However, some insurers include death benefits in their income protection plans, which will help a client’s family if they sadly die during the policy term.
Advisers may find it helpful to know which insurers provide death benefits, and how they work, as clients may find it reassuring that this benefit can pay for their funeral or used to provide their family with extra money if the worst came to the worst. In this insight we look at income protection death benefits and how providers compare.
Funeral costs can be expensive and many people will have earmarked savings for things like paying off debt and giving themselves a financial buffer in an uncertain economic climate. Using it to pay for a loved one’s funeral is not ideal, especially given the current level of redundancies.
Some families would not be able to give their relative a good send-off without taking out a loan, and clients would want to avoid saddling their family with this financial burden. Which is where the death benefits on income protection plans could come in to help.
* Legal & General : Not on Low Start plan.
* LV= : Not on Personal Sick Pay.
* Zurich: Not on Core plan
As our table shows, seven out of the 12 insurers supplying data provide a lump sum payment if the client dies within the policy term. However, three of those – Legal & General, LV= and Zurich – do not provide a lump sum payment on all their offerings, presumably because cost may be a barrier on more cost-conscious products.
As advisers know, there tends to be some variation between insurers in respect of the features on their protection products. Death benefits – or funeral benefit – is no exception as it can be calculated in two different ways.
Some insurers offer a fixed monetary amount, which has the advantage of being simple to explain. Others calculate the benefit as a multiple of the monthly benefit or premium, which is more flexible than a rigid monetary amount. This can be helpful because clients will have a range of views and expectations when it comes to their funeral arrangements – some may want simple ‘eco-friendly’ funerals while others may prefer something more traditional.
As our table shows, there is an equal split between insurers who calculate death benefit as a fixed monetary amount and those who use a multiple of the monthly benefit. Legal and General offer a multiple of the monthly premium.
A fixed monetary amount is preferred by AIG, LV= and Cirencester Friendly. As to be expected, there is little uniformity between the amounts they will pay.
In terms of how much death benefit would be paid, these contrasting approaches make quite a difference depending on the benefit involved as our chart shows:
*The amount that Cirencester Friendly will pay is based on either the amount of bonus or accrued benefits built up and therefore the longer the plan is in force the more that is likely to be paid
**The amount Legal & General and Royal London will pay is based on 12 times the monthly premium and therefore the higher the premium the more that is likely to be paid. It is unlikely to exceed other insurers however.
If death occurs within the first four years of the policy LV= will pay £5,000 whereas AIG will pay double that at £10,000. After four years of the start of the policy, AIG will still pay £10,000, and LV= will also pay £10,000 at this point.
Cirencester Friendly society does things a bit differently to other insurers. As a friendly society it has no shareholders, so members can share in its growth through regular bonuses, which can build up a tax-free cash fund. Upon death, where the client has elected to participate in Cirencester Friendly’s bonuses to accumulate a capital sum, the Income Assured Enhanced plan will pay the value of this to the next of kin.
On Cirencester Friendly’s My Earnings Protected plan, if the member dies, any unpaid accrued benefit will be paid to the member’s representatives/next of kin.
Four insurers, British Friendly, Legal & General, Royal London and Zurich calculate death benefit as a multiple of either the monthly benefit or the premium. Again, as expected, there is some variation between them.
The multiple applied by British Friendly and Zurich is six times the monthly benefit. Royal London doubles this at 12 times the monthly benefit and also includes the monthly plan charge. Legal & General takes a different approach – it will pay an amount equivalent to the annual premium if premiums are paid annually, or 12 monthly premiums if premiums are paid monthly.
Where benefits are calculated as multiples, it is possible for insurers to cap this at a certain monetary amount. However, our data shows that only one insurer, Zurich, does this. This means the death benefit it will pay is six times the monthly benefit subject to a maximum of £10,000.
As income protection plans are not really designed to pay out on death, death benefits are not necessarily contractual benefits that are included in the terms and conditions of the policy.
Some insurers include death benefits on a discretionary basis or as an added extra. This means insurers are under no legal obligation to provide death benefits and could remove them at a later date if they wanted to. This is not the case where death benefits are contractual benefits.
Of the seven insurers providing an income protection death benefit most do so as a contractual benefit. Only two friendly societies – British Friendly and Cirencester Friendly – do not offer death benefits on a contractual basis within their income protection plans.
Overall, AIG stands out for having the highest death benefit in fixed monetary terms, at £10,000. Maintaining this level regardless of whether death occurs within or after the first four years is also a good thing as it is nice and simple.
Things to reflect on for CPD:
- Which provider to you think provides the best funeral benefit? Give two reasons.
- Is this a ‘nice to have’ feature or a key part of your recommendations? Why?
- Would you answer change for different clients? Why?