A Scottish politician’s campaign for a man denied access to state benefits because of his protection policy has reignited the debate about the government’s role in incentivising protection purchases.
Jamie Hepburn MSP’s Falkirk constituent took out a protection policy to ensure mortgage and loan payments were covered if he became unemployed. When he lost his job the policy payments took him above the threshold for claiming income-based job seekers allowance.
A spokesperson for the Department of Work and Pensions told Health Insurance that insurance payments would be taken into account when calculating a person’s entitlement to income-related employment support allowance (ESA), except for income from a mortgage protection policy.
Alan Tyler, a member of the Income Protection Task Force, an insurance industry body, said that most income protection (IP) claimants would qualify for contribution-based ESA, which is not subject to means testing. This is because they would have had to have been in regular employment in order to be accepted by IP providers. Tyler said that disability living allowance was also available to those in ill-health, without means testing.
However, he warned that under group IP schemes, where the employer terminates the employment of the absent employee, the pay-out will be treated as a pension payment. If this, together with any other relevant payment like a pension, exceeds £85, then ESA is reduced by 50% of the excess. Tyler said this rule was in place to encourage employers to retain an interest in the person’s recovery.
Protection providers regularly argue that the inadequacy of state benefits should be a major driver for sales of their products and some, including Fortis, do not deduct benefits from IP payments. However, many do take benefits into account when calculating the level of salary replacement they will provide.
“We never assume people won’t need additional support from the state,” said Paul Hudson, chief executive of IP provider Cirencester friendly. “After all, IP benefits are not intended to replace all of a person’s earnings lost through illness or accident, partly because benefit is ‘tax free’, subject to certain conditions being met, and there must be a margin to provide an incentive to return to work if at all possible.
“There may be certain benefits they receive that are not related to their earnings from employment and that they require because of their disability. But there are certain benefits we would take into account, to ensure there is an incentive to return to work if that is possible.”
Friends Provident also deducts from IP payments the benefits the claimant is receiving, back to a maximum of 75% of the sum assured.
Ed Stuart-Brown, head of protection sales at the insurer, said that it was important to focus on the rehabilitative element of IP as well as the financial aspect.
“What we know about a number of illnesses that turn into longer-term disability is that the longer people are inactive the less likely they are to return to work,” he said. “There always has to be an incentive to get back to work. If you were not disqualified from state benefits and they were not discounted from the IP policy, you could get someone getting close to their income and the incentive to get back to work diminishes.”
Stuart-Brown gave the example of a self-employed contractor in the construction industry who was able to return to work much earlier than planned because his Friends Provident IP policy paid for him to undergo surgery privately, bypassing a year-long NHS wait.
Stuart-Brown described state benefits as providing a “bare subsistence” for those unable to work, and called on the government to reward those who took action against reliance on the state.
“I think one of the things we will start to see the industry campaigning for, particularly if there is more of a move towards compulsion with personal accounts, is to say there has to be some sort of incentive for people to take personal responsibility,” he said.
Chris Hulme, director of the Clayton Hulme Partnership, an IFA based in Manchester, suggested that the government could reinstate life assurance premium relief (LAPR), now only available to qualifying policies taken out before 1984.
“It would be nice to see such relief not only brought back, but extended to critical illness and IP,” he said. “Tax relief on protection premiums would be a suitable stimulant for clients to think, ‘actually, I should take responsibility for myself’. It would bring CI and IP into the realms of affordability.”
Those incentives are much needed, according to official statistics (see red box below). Fewer than 10% of people without protection are considering purchasing it, although the protection gap is estimated to be far larger than that.
STATE BENEFIT: THE ELIGIBILITY RULES
Prior to October 2008, there were three major benefits available to people out of work:
Job seekers allowance (JSA) for those fit for and looking for work
Incapacity benefit (IB) for those unable to work due to health problems
Income support (IS) for those out of work for any reason who did not have enough money to live on (including those either not eligible for or in receipt of JSA and IB)
Eligibility for JSA and IB was based on the person’s national insurance contribution record. JSA was limited to six months benefit payments while IB payments continued for as long as you were unfit for work. Eligibility for IS was determined by means-testing with both capital and income limits.
From October 2008, ESA replaced IB and IS was (for claimants after that date) merged into JSA and ESA so that each now has a contributory and an income related (means-tested) stream, JSA for those fit to work, ESA for those unable to seek work due to health problems.
ESA, unlike JSA, is not time limited. It only ceases if you are considered fit for work or you reach retirement age (at which time, any insurance would also cease). Individual IP payments are not offset against contributory ESA and it is highly unlikely that anyone claiming means-tested ESA would also be an insurance claimant.