Fine-tuning your income cover
Q: My employer provides group income protection and severe illness cover. What will happen if I become self-employed or begin working for an employer that does not offer such cover? How can I protect myself, especially if I am in mid-career?
A: Under such a circumstance, you would be left with a gap in your assurance and should take out a private assurance policy to replace the protection that was being provided by your previous employer.
If you don’t do this and you suffer an injury or illness which leaves you unable to work, you may be left with no income and no cover against the costs of severe illness.
Often, the group cover your employer provides has a feature that guarantees you access to private assurance with similar cover, if you leave the employer. This is usually known as a continuation option.
It is important to consider exercising a continuation option on your cover when you may not otherwise be able to obtain private cover – for example, because of a health condition.
Continuation options normally have some rules attached to them. For example, you may need to be below a certain age to exercise the option; you may need to let the insurer know that you intend using the option within a set time (typically 30, 60 or 90 days after leaving your employer); and the amount and type of cover you can purchase through the option is normally restricted to what your employer was already providing you with.
Another way to protect yourself against the risk that you might not be able to obtain assurance in the future is by purchasing a future insurability option on a private assurance policy (even if you already have cover with your employer).
Assuming your health is such that you are currently insurable, you can purchase this type of option and effectively pay a premium for the right to be able to take out cover in the future, even if your health at that point is worse than would have been required to qualify in normal circumstances.
There are, however, rules on these options with which you would need to familiarise yourself. For example, you may have to test negative for HIV; the times you can use the option to purchase additional cover may be restricted to defined events, such as a policy anniversary or marriage; the amounts and types of cover you may purchase may be restricted; and the option may fall away if you don’t exercise it within a certain period. The precise rules of such options vary from insurer to insurer.
Q: If I have a disability policy that pays out a lump sum on disability, can I convert it to an income protection policy that pays me out a regular income on disability and vice versa? This may happen, for example, if I had one type of cover privately and the other through a retirement fund group scheme and then changed employers and needed to switch my cover.
A: The need you have to protect your income may be met through a combination of lump-sum benefits and income protection benefits.
How you choose to structure the combination of such benefits is up to you, and if you choose to change it, you should consider doing so with the help of a well-qualified independent financial adviser.
For example, if your employer suddenly started providing you with cover that would provide an income should you become disabled and unable to work, you might find that the cover you have as a lump-sum benefit on a private policy could then be reduced.
However, such a “conversion” is not actually a built-in feature of the product – you would have to alter the constituents of your life assurance portfolio.
With the help of a financial adviser, you need to carefully consider whether switching between different benefits is the best course of action to follow.
For example, it may not be cost-effective in the long run; your cover might be somewhat different, as lump-sum benefits and income protection benefits may pay out on different events; you may not qualify for one type of cover (for example, certain occupations may disqualify you from an income-protection product); and you would most likely need to have your health re-evaluated as part of the application process for the new benefit.
Q: Is it possible to take out life assurance privately that tops up aspects of my group cover?
A: In most cases, cover provided by your employer is not sufficient for your needs. This is because such cover is normally based on your pensionable salary, typically 70 percent of your full income.
Normally, there would be scope for you to add either lump-sum or income-based cover (or a combination) to supplement the cover provided by your group benefits.
Q: I would like to have cover that ensures I am paid out should I be unable to do my own occupation. My group life cover will, however, pay out only if I am unable to do either my own occupation or a similar job. Is it possible to take out top-up life assurance privately that would, in effect, narrow the occupation criteria used in my group cover.
A: It is not usually possible to “top up” the claim definition of the cover. The reason for this is that despite the differences in claim definitions there would still be many circumstances where an event would be covered on both a benefit that pays out if you are unable to do either your own or a similar occupation and one that pays out if you are unable to do your own job only.
In effect, this means that you would be over-insured for certain events.
Q: I have cover provided by my employer that protects against permanent injuries and illnesses that would leave me unable to work. Can I top up this cover with a benefit on a private policy that protects me against temporary disabilities as well?
A: Usually it is only cover that pays a monthly income on disability that provides protection against temporary disabilities. Lump-sum assurance usually requires the disability to be permanent.
An income protection benefit that provides a limited number of payments – typically for 24 months – can be purchased from most companies to cover your full income for the period, irrespective of the lump-sum benefits you have in place.
Such a benefit would provide protection for the specified payment period against either a temporary or permanent injury or illness that leaves you unable to work. Insurers tend to allow this because the limited number of payments are unlikely to result in any significant level of over-insurance.
Where the income-based benefit offers a payment period right up until retirement (or even beyond), over-insurance becomes a greater concern for assurers. How much of this type of cover you can buy may be limited if you already have cover provided by your employer.
Q: What happens if I have over-insured my income?
A: The intention of income protection assurance is to compensate you for losing your ability to earn your income as a result of an injury or illness. It is not intended to place you in a better financial position than before you suffered such an event.
Over-insurance can have the negative effect of causing people to claim or continue to claim when, in fact, they are able to work.
Allowing policyholders to over-insure themselves would likely be to the detriment of all policyholders, as it would result in premium increases.
In addition, it has potentially negative psychological effects for the individual claimants and negative effects for society at large.
To protect against this, assurers generally restrict the amount of disability cover that may be taken relative to your income. The limits are generally:
* For the two-year period immediately after a claim event, up to 100 percent of your income can be covered.
* For the period after the first two years, up to 75 percent of your income can be covered. Some assurers will cover up to 100 percent of income for condi-tions that are deemed permanent or particularly severe and from which you are unlikely to recover – the precise rules vary from assurer to assurer.
When applying for income protection cover, assurers will consider the cover you already have in place (or are applying for concurrently) to determine the maximum amount of cover they will allow you to take out relative to the limits above.
However, even though the amount of cover may be checked at application stage, it may still be possible that you become over-insured. For example, you may become over-insured over time if your salary increases at a lower rate than the automatic increases that may apply to your cover.
If a claim arises and it is found that you are over-insured, most assurers reserve the right to restrict the claim amount, using your actual income as a reference.
Liberty has taken a slightly different approach in its latest income protection benefits. It offers clients the opportunity to provide proof of their income either at outset or at claim stage.
If you provide proof of your income at application stage, except for a few defined circumstances, Liberty won’t require you to prove your income again at claim stage. This provides you with much greater security that your benefit won’t be restricted at claim stage.
It is important to regularly review your cover and ensure that it is in line with your needs. If you are over-insured, it would be better to decrease your cover amount. This will result in a saving on your premiums and will give you peace of mind that your benefit won’t be reduced at claim stage.
Q: If I have cover for own or similar occupation, will my life assurer find me a similar job if I am disabled?
A: Typically the role of the assurer in assessing a claim on an “own or similar occupation” definition is to assess whether an injury or illness that you have suffered causes you to be unable to perform the job you nominated or another job you could reasonably be expected to follow, taking into account factors such as your education, previous training and work experience.
The assurer would not usually be involved in actually placing you in such a job.
Q: What is the maximum age at which I can take out income protection?
A: The maximum age at which you can take out this type of policy varies from assurer to assurer and in some cases the particular product being purchased. At Liberty, the maximum entry ages are 63 for lump-sum disability benefits and 59 for income protection benefits.