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2.2.3 Income Protection Insurance (IPI)

PHI - glossary definition

  • Click to see statistics which may surprise you·Under an income protection insurance (IPI) policy, an income is paid to the policyholder in the event of sickness or disability at the end of an initial waiting period (usually 4,13,26 or 52 weeks). The benefit is payable until the earlier of expiry of the policy term (usually age 60 or 65), the policyholder's return to work, or death. The main purpose of the policy, therefore, is to replace income, potentially until retirement.

  • There is no standard definition of disability. Generally, the policy wording will require policyholders to demonstrate that they are totally unable by reasons of sickness or accident to follow their own occupation, or in some cases, any occupation to which they are suited.

  • Unlike life assurance, the underwriting considerations are based on morbidity (i.e. incidence of sickness and accident) rather than mortality. Thus, occupation in particular is a much more important feature than with life assurance from an underwriting point of view.

  • The main features of IPI policies are:


    1. A regular income during long term disability.
    2. The policy is non-cancellable by the insurance company, hence the term 'permanent'
    3. Benefits may be level or increasing.
    4. A proportionate benefit payable on part-time return to work.
    5. A proportionate benefit applies if a lower paid job is taken due to the disability.

  • Cover under such policies is always limited to a proportion of the individual's income. The rationale being that it is important for the policyholder to have an incentive to return to work and so is not better off by claiming under the policy. At the very least, therefore, the policy income could safeguard essential expenditure, such as mortgage payments or medical costs, if there is no other cover.

  • · Benefits payable under individual IPI policies are tax free. Because of this, most providers limit the maximum that can be insured to 50-60% of gross income. The rationale being that this amount together with State incapacity benefit equates to an individual net income.

  • These arrangements do not apply to Group IPI where benefits are normally passed on to the employee and taxed under the PAYE system.

  • An important feature of income protection insurance policies is that, as the name implies, the insurance company does not have the option to cancel the policy, irrespective of the number of claims that are made.

  • IPI policies may be written to provide level or increasing benefits. Benefit increases are available, either at a predetermined rate, e.g. 5% per annum, or in line with the Retail Prices Index or an earnings index.

  • Once the insured person is able to return to work, benefit will usually cease; sometimes individuals are only able to return initially on a part-time basis, in which case a proportionate benefit may be paid. Equally, it is also sometimes possible that individuals are only able to take on a lower paid occupation; once again the IPI policy will pay a benefit proportionate to the reduction in the individual's earnings.

  • You should note that most underwriters charge higher premiums in relation to females; this is because of the higher statistical incidence of claims.

  • Benefits are limited as noted above; calculations usually taking into account any other benefits from similar policies so that the total income does not exceed the providers current maximum percentage of the individual's income before disability.

  • This concept becomes rather more difficult to define in the case of self-employed people and checks will be made at the point of claim by reference to the accounts of his business.

  • There are some exclusions from such policies, but they vary amongst life companies. The growth of AIDS in recent years has led to this becoming an exclusion in virtually all IPI policies; and other exclusions could include:-


    1. Intentional self-inflicted injury.
    2. Disability arising from alcohol or drug use other than as prescribed by a registered medical practitioner.
    3. Disability arising from an act of war or invasion whether declared or not.
    4. Participation in a criminal act.
    5. Pregnancy, child-birth and any complications arising.
    6. Aviation other than as a fare-paying passenger.

  • Occupation is a key element in the pricing and underwriting of IPI. Typically, life offices categorise occupations into classes 1 to 4; class 1 representing the lowest risk (clerical and professional occupations), and class 4 the highest. There are major differences in the premiums charged between class 1 and class 4 risks, and there are a number of occupations where cover will often be unavailable for income protection insurance policies.

  • If an individual's occupation changes, requirements vary. Some offices continue cover regardless of the basis that it is extremely unlikely that, for example, an individual in a professional occupation is likely to change his job to, say, a steeple-jack. Others immediately cease cover if there is a change, or at least require notice to reconsider the situation.

  • 'Conventional' policies are similar to term assurance in that there is no investment element within the policy and if the policy terminates it has no value other than claim value.

  • 'Unit Linked' policies, however, benefit being the IPI cover which is paid for by a monthly cancellation of units. A residual policy value is present in the event of death or early surrender, represented by the value of units under the policy less any charge deducted by the life office.

  • Premiums are calculated using assumptions regarding the growth in the value of the underlying units. Policies are normally reviewed from time to time (often every five years) to see whether those assumptions have been borne out, and depending on the outcome of such a review there may be a premium adjustment

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