Income protection insurance: don’t slip up on the small print
Posted on February 1st, 2010
Don’t slip up: check income protection (permanent health) insurance policies carefully – you could find you won’t be covered even if you break both arms. Photograph: Getty
Insurance policies promising to pay an income when customers fall ill or have an accident are failing to meet claims for even for the most basic serious injuries, including two broken arms or even blindness.
Research by Alan Lakey, a leading independent expert at Highclere Financial Services in Hertfordshire, found that policies sold in their thousands each year by many of the UK’s biggest insurers – including Axa, Bupa, Aviva, Scottish Equitable and even Prudential – vary greatly in their terms.
The result is widespread confusion among consumers about what income protection insurance or permanent health insurance actually is, as well as what it delivers.
“There is a big gap between what we say it is and what consumers are trying to grasp,” says Ron Wheatcroft, co-author of a recent paper on the issue for insurer Swiss Re. “It is also difficult to get the balance right between choice and complexity, which can be a barrier.”
Permanent health insurance (PHI) pays a regular income if you suffer long-term sickness or injury.
Benefits usually start after a waiting period of between four and 52 weeks, typically after work-related pay stops. It is payable until you return to work, die, or the policy term expires.
Most financial advisers believe PHI is better than many other variants of “protection” insurance. They point out that almost 3,000 people launch a claim for long-term benefits every day, but current state benefits are just £89.90 a week, even at the highest rate payable after 52 weeks’ sickness.
When interior design consultant Roy Farrell, 49, was advised to consider PHI in 2001 he wasn’t keen on the idea. “But with three young children, it made sense to protect the family if anything went wrong,” says Farrell.
He was glad he did. One day, while riding his Ducati Monster on to the M4 motorway, Farrell came off. “I broke every bone in my leg – toes, ankle, tibia, fibula, femur – and needed skin grafts as I only had jeans on. I was off work for nine months and it was another three months before I was back to normal,” Farrell recalls.
Although forced to put his interior design company, Farrell & Co, on hold, Farrell was able to claim PHI payments worth about £900 a month. Together with state sickness benefits and tax credits, he was able to keep the family’s finances above water. “Without that money we would have been in a lot of trouble,” he admits.
Lakey’s research found vast differences between policies, however. For example, rather than pay out simply because claimants cannot return to their old job, many insurers require them to be unable to perform certain “daily living” tasks. Lakey says 20 different activities are used, although they are not identical. Scottish Equitable’s definition of “communicating” requires an inability to hear conversational speech in a quiet room, understand simple messages and speak with sufficient clarity to be heard. But rival insurer Bright Grey defines “hearing” and “speech” separately.
Somebody unable to hear or speak would therefore achieve Bright Grey’s requirement, which is a failure to perform two out of six tasks. With Scottish Equitable it only accomplishes one of the three failures, leaving the policyholder requiring two additional failures. Even a simple definition of walking 200 metres differs wildly. Some insurers add a stick, thereby reducing the chances of a claim, while others pay out if walking involves “significant” discomfort.
Replies from insurers to Lakey’s survey found a claim caused by two broken arms would fail at Axa and Friends Provident, but would receive a payout from Zurich, Shepherd’s Friendly and, possibly, Aviva. Lakey says: “I’ve asked insurers when they will come up with common definitions. In some cases they tell me that their IT systems are tied up years in advance. In other cases, all I’ve had is a shrug of the shoulders.”
Colin Last, a financial adviser at Tamar IFA, based in Wokingham, Berkshire, says: “I would add a cynical view – that sales of income protection policies have been in decline and product providers have no interest in spending a lot of time trying to come up with common definitions.”
Ed Stuart-Brown, head of protection sales at Friends Provident, agrees that different definitions can be confusing. But he points out: “The danger with standardising things is that it means providers like us can’t then offer a better product to consumers.”
Lakey recommends policies where a payout is triggered by an inability to carry out one’s “own occupation”.
He also advises watching out for exclusions: some companies might reject claims on the grounds that the disability occurred in the course of “immoral or disorderly conduct” or an illegal activity. In theory, this could mean dangerous driving or just being drunk.
For those needing cheaper monthly payments, Lakey suggests reviewable premiums rather than long-term fixed ones. Although reviewable policies do go up in price, this is partly offset by the fact that there are fewer years left to cover before retirement.
? Have you had a claim unexpectedly turned down on a health policy? Do you think the insurer’s reasoning was justified? Share your views with us at [email protected] or write to us at Cash, The Observer, Kings Place, 90 York Way, London, N1 9GU.
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