Income Protection – Claims Update For Financial Broker Use Only

Karen Gallagher, Product Director – Individual and Group Protection

Reminder of what IP does

INCOME PROTECTION

COVER

Pays up to 75% of salary

On an own occupation

basis

Covers any illness,

accident or injury

Pays after deferred period to retirement or return to work

Reminder of what IP does

INCOME PROTECTION

COVER

Pays up to 75% of salary

On an own occupation

basis

Covers any illness,

accident or injury

Pays after deferred period to retirement or return to work

• Individual• Executive• Group

Cover for?

• Own Occupation • Any illness, accident or injury• Loss of earnings

– Until able to return to work– Or Retirement Age– Or Death

• After the set deferred period• Can be partial payment if not totally unfit

Claims 2017

The reasons why people needed to claim on their Income Protection in 2017

Friends First Health Trends

Orthopaedic

Psychological

Cancer

Neurological

Respiratory

Cardiac

Other Medical

25% - Orthopaedic

21% - Psychological

20% - Cancer

6% - Neurological

4% - Respiratory

3% - Cardiac

21% - Other Medical

Claims 2017

Friends First Health Trends

Claims 2017

Friends First Health Trends

Claims Statistics

Trends

• Average claim has increased by 2.5 years since 2016, average claim was 4 years in 2016, it proves that more people are relying on income protection and need longer to recover

• Cancer claims have increased by 6%, with advances in medicine more people are recovering from cancer

• 46% of claimants were under 50 at claim stage in 2016, this has increased to 59%. We all think it won’t happen to us, but it does and quite young too…… the average age of claimant was 47…. The youngest was 27

Cover in Claim

• Policy covers for loss of income – so this has to have taken place!

• Ensure self-employed have correct cover – net profit

• These are reviewed regularly on claim

• Propensity to claim can be an issue – safe guards against this:

– Limit of benefit

– Deferred period

– Cover for previous 12 months earnings

• WHY – premiums reflect

The Mind set …..

Hormesis: Dose and Response

Exercise is Medicine

The biopsychosocial model is a broad view that attributes disease outcome to the intricate, variable interaction of biological factors (genetic, biochemical, etc), psychological factors (mood, personality, behavior, etc.), and social factors (cultural, familial, socioeconomic, medical, etc.).

Issues…

• Taxable income

• Residency at time of claim

• Subjective view

• Proximity to centres

• Claims philosophy of the insurer

The Claims Process

• Financial Advisers should be involved

• Seen as value add as opposed to other buying methods

• Claim form– Proof of earnings– Tax details – Medical

• Life Company Claims Handler and supporting health professionals

• Early notification is key

• Medical reviews depend on the condition

• Rehabilitation can be offered, but is not part of the policy conditions

Individual Income Protection

• Individual Income Protection polices are sold to the following;

– PAYE employees – P60 (Gross Income for USC )

– Self-Employed and Company Directors – Accounts and Notice of Assessments

• Sum Insured is selected at the start of the claim, based on earnings at the time ( and also affordability ), however not financially underwritten at application stage

• At claims stage, financially underwritten based on the individual’s earnings for the year to prior to disability. These earnings may differ greatly from the earnings used at the start of the claim, which may in turn lead to under or over insurance – STATE ILLNESS BENEFIT

• Benefit is taxable at source

Executive Income Protection

• Very similar in many respects to Individual Income Protection in the way both Pre-Disability and Post-Disability Income assessed

• Main difference is that the company takes out the insurance usually on the principal or senior employee(s)

• Benefit is paid to the company and is not taxable at source

• Company may also add PPC – pension protection contribution benefit in addition to IP benefit (depending on provider)

• Evidence of income will normally be a P60

The Financials

• Loss of income – may be not clear

• PAYE

• Self-employed/Sole Trader more complex

• Executive or Group IP arrangement – employer involved

• State Benefit :

– Changes for since January 2018

– Class S PRSI provided they have made 5 years worth of PRSI

contributions and made at least 48 contributions in the previous tax

year.

Individual Income Protection

Different Categories of Self-Employed• Sole Trader

• Partnerships

• Company Director

Challenges with Self-Employed • Control over their own financial affairs including income

• Can be difficult to ascertain earnings / income

• Different accountants may assess income in a different manner

• Company director does not have to pay a salary to himself

• May also have various sources of income

Sole Traders and Partnerships

Sole Traders• Usually one person or small business - manual trades – plumber, electrician and

also small retail and service businesses – dry cleaner, courier, newsagents • Simple structure, less onerous accounting requirements including need for certified

accounts • Liability is unlimited if business gets into trouble or fails and can be sued personally• Taxed on net profits • Drawings are not in the Profit & Loss account and are not taxable

Partnerships• Mostly seen in professions, e.g. doctors, solicitors, accountants, etc.• Taxed on share of profits• Like sole traders drawings are not taxable• Usually unlimited liability and partners are joint and several liable for debts of

partnership• May be a partnership agreement in place to deal with situations where a partner is ill

and how this interacts with IP benefits and if still entitled to share of profits

Financial Evidence for Sole Traders and Partnerships

• Certified Accounts• Form P11 ( self-assessment return to Revenue )• Amended Notice of Assessment ( adjusted return back from Revenue )• In most cases, returns are automated and usually only validated by Revenue if business is

selected for a Revenue audit ( e.g. recent audit of medical profession )

• Satisfied that the pre-disability income is sufficient to support the Sum Insured ?• Is the evidence of pre-disability income up to date enough ?

• Accounts and Notice of Assessment are not always on the same basis – accounting year could be 31.03.2015 and these form the basis for 2015 Notice of Assessment, therefore need to be careful when considering pre-disability income depending on when the date of disability occurs e.g. if Date of Disability is November 2016 then this evidence could be almost 2 years out of date

• Drawings are not acceptable as evidence of income – as claims trying to determine the profitability of a business prior to disability and drawings may come from cash or bank overdraft

Case Study 1 – Evidence of Income Sole Trader

• Date of Disability December 2015

• Sum Insured €21,840

• Evidence of Income Received

• Form 11 Year of Assessment 2015 €27,358

• Benefit Payable €20,519

(75% * €27,358)

Company Directors

• A small limited company – a director’s salary is taken and company makes

a loss• A company’s profit or loss is usually immaterial for IP purposes, it’s about

the P60 salary taken from the company, however sustained losses could be an indicator of motive for a claim and may lead to a greater assessment of the medical evidence, particularly if it is very new policy or the illness is subjective

• Director’s loan repayments should not be regarded as income for IP

purposes

Case Study 4 – Evidence of Income Company Director

• Date of Disability April 2017

• Sum Insured €78,000

• Evidence of Income Received

• Company Accounts 2016 / P60 2016 €116,004

• Benefit Payable € 78,000

Limitation of Benefit

Limitation of Benefit

• (i) 75% of Earned Income, less:– (a) the annual rate of any continuing salary, commission, pension or other

income, and– (b) the annual rate of benefits payable under any other insurances against

disability, and– (c) the annual amount of the current State Illness and– (d) the annual equivalent amount of any compensation for loss of earnings either

by virtue of a Court Award or by way of settlement in respect of a claim for loss of earnings due to the Member’s disablement.

Post Disability Income

• In most cases where there is potential for a self-employed individual to return to work, it is in the company’s interests that the business continues on in their absence

• However, also need to ensure that they are continuing to suffer a financial loss as a result of their absence as in some instances a business may do the same or better without the principal

• Should be expecting to see a financial impact on a business, either through a drop-off in turnover due to the principal not being there to generate new business and / or through an increase in expenses due to taking on additional staff to replace the principal

• It is important therefore that there is a continual review financially of the claim, in addition to the ongoing medical review, requesting up to date accounts and other financial information as required

Benefits on Returning to Work

Proportionate Benefit• different job, lower salary, pro rata benefit.

Rehabilitation Benefit• part time, pro rata

Relapse Benefit• immediate payment if relapse within 6 months• no deferred period

Proportionate Benefit

Proportionate Benefit• The Insured may be entitled to a Proportionate Benefit in a situation where he does

not qualify for Disability Benefit because:

• The Insured is not totally disabled by reason of sickness or accident to fully carry out his Normal Occupation and is able to do part of his Normal Occupation resulting in a loss of income; or

• The Insured is totally disabled from following his Normal Occupation but is doing a different occupation for profit, reward or remuneration resulting in a loss of income.

• Proportionate benefit may continue to be payable until:– the Insured dies– the Insured returns fully to his Normal Occupation or another equivalent occupation– the Expiry Date of the policy– The company commences or resumes paying Disability Benefit.

Taxation of IP Benefits

• All Individual IP policies receive tax relief at source on the premiums ( up to 10% of income ) and benefits are subject to taxation at source

• Does not follow if tax relief isn’t claimed then benefit can be paid gross

• Benefit from another jurisdiction is taxed even if no tax relief on the premiums was received

• Executive and Group IP benefit is paid directly to the employer and passed on to the employee – taxed as normal income

Right of Appeal

• Company’s procedure

• Ombudsman

Rehabilitation

Own occupation policy conditions don’t require claimant to undergo rehab

Probability of RTW after time off

Partners

Partnership

Re-Training

When does the income protection conversation work best?

It should be seen as the cover that covers everything else in your clients financial plans:

Dependency….Income

Without Income these fall away

Investments

Term

Pensions

Claims Commitment

• Claims must be assessed in a fair and reasonable manner

• The Companies want to/need to pay claims• The Financial Advisor’s role:

– Underwriting– Client’s Expectations– Interaction at Claims Stage working together to get

great outcomes for the client