Income Protection Policy Query

bloke91

Hi

Looking for some guidance and help please.

I have an existing Income Protection Policy with one of the big providers. This policy increases yearly with inflation and the policy has a yearly anniversary review.

I queried with the policy provider if this is likely to increase over time due to age, they say not and the yearly review is against the market. My policy monthly premium has both gone up and down since when I took it out. I am now 37 and I took it out at 23.

Defiantly feel index linked policies are a good thing, but I am worried that because the policy is reviewed annually it could increase as I get older due to the policy review as well as the index linked increase.

Do I therefore consider taking out a new policy that is still index linked but listed as guaranteed monthly premium which I presume means no annual anniversary premium review????????

I don't understand how a new policy I have been quoted can be listed as guaranteed monthly premium whilst at the same time index linked and therefore the price may go up and down??????

Hopefully that makes sense, please feel free to ask any further questions required.

Thanks in advance for your assistance.

Weighty1

ALL index-linked Income Protection plans will increase as the level of benefit goes up. It is the underlining rate that is guaranteed. So aside from increases in premium due to the level of cover increasing there will be no other increases.

Chris_Pollard

Hi bloke. I can be quite complicated, but this is how a number of the guaranteed Income Protection (IP)policies work. It might be quite a long reply, so I'd pop the kettle on. To help I'll keep the numbers simple and for arguments sake you'll retire at 60.

With indexation you can usually chose a fixed percentage, or RPI. At the end I'll put I'll put in a warning, but let's assume it is a fixed 5% as you're confident your income will also increase by 5% each year.

If you think of your IP policy as a collection of "slices", the very first slice is the original monthly benefit and premium and guarantee period. Each year, if you increase you add another slice. The new slice SHOULD be guaranteed in its own right for the remainder of the term. Each year you are offered a new guaranteed premium for the new slice. Each time you accept, this further guarantees that slice till retirement.

A few things. Firstly although your new slice of benefit will increase by the indexation amount, the amount of premium for that slice will vary. In the table below, I have increased the benefit by 5% but the premium by 6%. This was purely to illustrate the point. However, as you get older, the premium increase for the new slice might be even more expensive, so you might find after 10 years, a new 5% slice could cost 10%. However, all the slices you have already taken are guaranteed.

You can, of course, decide not to take an increase option one year. Some IP plans will say you can only do this once, some say you can miss two, some three. When you lose the index option, you can still apply to increase the monthly benefit, but you will be asked medical questions and if your health has changed, the increase might be refused. I hope this makes sense.

Premium Monthly Benefit Total Premium Total Benefit
Year 1 £30.00 £1,000 £30.00 £1,000
Year 2 £1.80 £50 £31.80 £1,050
Year 3 £1.91 £53 £33.71 £1,103
Year 4 £2.02 £55 £35.73 £1,158
Year 5 £2.14 £58 £37.87 £1,216

Now, an important bit. Whilst some insurers guarantee a level of monthly benefit. Let's say your monthly benefit is above that amount. Regardless of the amount of cover you have, your IP benefit will be a percentage of your earnings. Let's keep it simple, 50% of gross income. If the indexation has out performed your income increases and your annual income in the 12 months before disability was £40,000, you would be entitled to £20,000 per annum in benefit, £1,666 per month. If you insured monthly benefit was £2,000 you would not receive this, you benefit would be reduced.

It is therefore really important that you keep track of your IP benefit and make sure that you don't accidentally over insure yourself. Insurers are just as keen to avoid this and every time they write about your increase they will remind you to check the level of benefit.

I'm sorry this was such a longwinded response, but I hope it make sense, and that the table has formatted properly....

Chris_Pollard

No, the table didn't format properly. Sorry......