Income Protection Insurance (IPI)

Under an Income Protection Plan – previously known as Permanent Health Insurance (PHI) – an income benefit is paid to the policyholder if they were unable to work because of disability caused by sickness or accident.

The benefit is paid, basically, as compensation for loss of earnings. Benefit will normally start at the end of an initial waiting period, the most common of which are 4, 13, 26 or 52 weeks long. They are payable until the policyholder either returns to work or dies, or the policy term expires. The policy term is normally linked to an expected retirement age.

All such policies have a maximum income benefit limit, which is typically 50-60% of average monthly earnings at the time of application. It is not higher than this, so as to deter people from effectively giving up work and attempting to live off of such policies by claiming against them for lesser issues.

The level of premium for the required amount of cover will depend on the type of plan and the company chosen. Some companies offer guaranteed or fixed premiums, whilst other plans reserve the right to review premium levels or offer the potential to build up a surrender value.

For a slightly higher premium, the option is normally available to have the level of cover automatically increased each year in order to potentially provide some protection against the effects of inflation.

The definitions of disability vary considerably. Generally, in order to make a valid claim, the policyholder must demonstrate that they are ‘totally unable by reason of sickness or accident to follow their own occupation’ or ‘their own and any other for which they are suited by reason of experience and/or qualifications’ or, indeed, ‘any occupation whatsoever’.

The definition of disability is obviously crucial for underwriting and claim purposes and will affect premium rates. Clearly own occupation offers greatest protection.

Applicants would have to be aged 18 or over to take out such a policy, and all proceeds upon a payout would be tax-free.