Under a permanent health insurance (PHI) policy (now often referred to as income replacement insurance), an income benefit is paid to the policyholder during disability caused by sickness or accident. The benefit is paid, basically, as compensation for loss of earnings to that person (see below). Benefit will normally start at the end of an initial waiting period, which is normally 4, 13, 26 or 52 weeks long. The benefit is payable until the policyholder returns to work, dies or the policy term expires, whichever is the earlier. The policy term is normally linked to the person’s normal retirement age.
The definitions of disability vary considerably. Generally, in order to make a valid claim, the policyholder must demonstrate that he is ‘totally unable by reason of sickness or accident to follow his own occupation or any other for which he is suited by reason of experience and/or qualifications’ or, indeed, ‘any occupation whatsoever’. The definition of disability, ie. whether ‘own occupation’ or ‘any occupation’, is obviously crucial for underwriting and claim purposes and will affect premium rates. Clearly premiums will be higher where the ‘own occupation’ definition is used. On the other hand, in the event of the policyholder becoming disabled, he will have more difficulty in satisfying the ‘any occupation’ test than the ‘own occupation’ test. The policy wording needs to be precise and clear to the layperson. In the case of Sargent v GRE (UK) Ltd (1997), although it concerned a personal accident policy, it was held that where the relevant policy provision was unclear (in this case the point at issue was the definition of disability on an ‘any occupation’ basis), in interpreting the policy the Court will consider the policy as a whole as well as its context, scheme and surrounding circumstances. In Sargent the Court held that the expression ‘any occupation’ had to be limited in its context to any relevant occupation (such that would be appropriate given the individual’s circumstances), and did not mean ‘any occupation at all’.
The main features of PHI policies are as follows:-
The benefits are a regular income during long-term disability/sickness
The cover will continue once the policyholder effects the policy and maintains premiums (even though health may later deteriorate)
Income benefits that may be level, may increase at a given rate or increase in line with inflation
The policy can offer the ability to receive a proportionate benefit if earnings are partly reduced (ie. because of part-time work)
The policy can offer the ability to receive a proportionate benefit if a lower paid job is taken because of the disability
The main objective of a PHI policy is to replace earnings lost through illness or disability without reducing the insured’s financial incentive to return to work. Otherwise the policyholder would simply be content to draw benefits for the rest of the term. All PHI policies therefore stipulate a maximum income benefit limit. Typically, this is in the region of 75% of the average monthly earnings of the insured in the year prior to disablement. Benefits from other PHI policies will usually be taken into account, and it is common for State incapacity benefit/Employment and Support Allowance to be taken into account in calculating the 75% limit.
The policyholder can choose, at commencement, for an income that stays level or one that increases at a predetermined rate each year. The option for increasing benefits costs more but the increase takes effect every year, irrespective of whether or not a claim is made. Thus, the benefit has some protection against inflation. Other policies may provide for benefits to commence after a set period of time – say 12 months. This may coincide with the period during which the employer continues to pay salary.
Sometimes, the disability will be such that the policyholder can work but only on reduced earnings – for example, if the policyholder can only work part-time or has to take a less well-paid job. In either case, the policyholder will only qualify for a proportion of the full benefit. This proportionate payment will be such that the insured will be financially better off than by staying at home but not so well off as he would be if he returned full-time to his normal occupation.
A PHI policy is permanent in that the insurer does not have the option to cancel it, no matter how often the insured makes a claim for benefit. Consequently, insurers frequently include a number of exclusions in their policy conditions and underwrite risks (including occupational risks) very carefully at outset.
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State benefits on incapacity
SOCIAL SECURITY BENEFITS/PENSIONS – STATE BENEFITS
Synopsis: Outline of benefits available on sickness or disability to the employed and the self-employed
Last Reviewed: Tuesday, July 29, 2014
Last changes made: Reviewed to take account of Budget 2014
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The nature of benefits provided by the State in the event of an individual becoming sick or disabled has changed dramatically in recent years. Historically there were two types of benefit provided – statutory sick pay provided to employees and sickness and invalidity benefits provided where statutory sick pay did not apply or had expired. From 6 April 1994, following the Statutory Sick Pay Act 1994, statutory sick pay has effectively ceased to be a social security benefit and became a compulsory minimum level of sick pay provided to employees, paid for in total by employers, although regulated by the DWP. So, although the benefit and its level is regulated by the DWP, it is payable from the resources of and by the employer.
Another reform was the Social Security (Incapacity for Work) Act 1994 which came into force from 13 April 1995 and which abolished the former sickness and invalidity benefits and replaced them with a new incapacity benefit. This Act also introduced two tests of incapacity for work which apply across the social security system with the exception of statutory sick pay and industrial injuries benefit. We will now consider statutory sick pay, incapacity benefit and employment and support allowance in more detail.
The benefit is available only to an employee, who is a person over 16 or under age 65 employed under a contract of employment and earning not less than the lower earnings limit for the purpose of National Insurance contributions (£111 per week for 2014/15). The claimant must be unable to work due to sickness for more than 3 consecutive days. The benefit is payable at a flat rate for a maximum of 28 weeks. Although generally speaking there is no right for the employer to recover the statutory sick pay from the State there is a scheme which provides financial help to employers who otherwise would be faced with funding a prolonged period of employee’s sickness without sufficient means to do so. Under the scheme, which is referred to as the ‘percentage threshold scheme’ or PTS, the employer may recover the amount of statutory sick pay paid in the tax month that exceeds a specific percentage of the gross (i.e. employer’s and employees’) National Insurance contributions liability in the same tax month. .
Statutory sick pay is subject to income tax and employees’ Class 1 National Insurance contributions. For 2014/15 the standard rate of statutory sick pay is £87.55 per week.
Incapacity benefit was introduced on 13 April 1995 to replace the former contributory benefits – sickness benefit and invalidity benefit, and is available for those whose illness or disability started before 27 October 2008. Those who make their claim after 26 October 2008 will be eligible to Employment and Support Allowance (see later). From October 2010 the old incapacity benefit is being slowly phased out.
Short-term incapacity benefit
Incapacity benefit had two elements, short-term and long-term. Short-term incapacity benefit consisted of two rates, a lower rate payable for the first 28 weeks to claimants who were self-employed and employees who did not meet the entitlement to statutory sick pay. A higher rate was payable to claimants after 28 weeks of sickness. As no claims could be made for incapacity benefit after October 2008, the short-term rate of incapacity benefit is no longer payable to anyone.
Long-term incapacity benefit
Long-term incapacity benefit is payable after 52 weeks, is taxable and always equal to the full rate of the basic State pension. For the long-term incapacity benefit there is also an age addition depending on whether the claimant is aged under 35 (higher rate) or aged 35-44 (lower rate) at the start of the period of incapacity. No age addition is payable to those who are 45 or over at the beginning of incapacity.
Increases for adult dependants who care for children and spouses aged 60 or over are payable at a lower rate during the first 52 weeks of incapacity and at a higher rate thereafter.
Increases for child dependants are available only where the benefit was being received at 7 April 2003. From that date is has been replaced by the Child Tax Credit.
Entitlement to incapacity benefit depends on the claimant’s NI contribution record. The adult dependency increases is means-tested. The other elements of incapacity benefit are not means-tested – except for those in receipt of certain periodical pension payments (see below).
In 2014/15 the following weekly rates apply:
– standard single person long-term incapacity benefit : £104.10
Incapacity benefit claimants in receipt of periodical pension payments
As stated in the previous section incapacity benefit is not a means-tested benefit. However, there are special rules that apply to those in receipt of pension payments. The rule is that where the pension exceeds £85 per week incapacity benefit is reduced by £1 for every £2 of the excess. Pension payments are those arising from an occupational pension, personal pension, retirement annuity or income protection policy.
For example, if a claimant has a personal pension of £120 per week his/her incapacity benefit entitlement will be cut by £17.50 per week.
From 27 October 2008, for new claimants employment and support allowance replaced incapacity benefit and income support claimed on the grounds of incapacity. The new system considers what an individual is capable of, and what help and support they need to manage their condition and return to work.
The Government proposes transferring all existing incapacity benefits claimants to employment and support allowance by 2013. The cash levels of existing benefits will be protected.
Work capability assessment
As part of this new stricter test for benefits, the Work Capability Assessment was introduced in October 2008. This test is now applied to anyone who claims employment and support allowance benefits. It assesses what an individual can do – rather than what they can’t do. The assessment looks at people’s physical and mental ability, including conditions such as learning disabilities and other similar conditions.
The DWP has stated that following this assessment most individuals will be given support and employment advice to enable them to return to work where possible. People whose condition causes very severe limitation of their ability and who are not able to engage in any work-related activity, will get a higher rate of benefit. They will still be entitled to support and employment advice.
From 2010, the Work Capability Assessment is being applied to existing incapacity benefit claimants.
Employment and Support Allowance Rates
|Employment and Support Allowance
|25 or over
|18 or over
|Both under 18
|Both under 18 with child
|Both under 18 (main phase)
|Both under 18 with child (main phase)
|One over 18, one under 18
|Both 18 or over
|Claimant under 25, partner under 18
|Claimant 25 or over, partner under 18
|Claimant (main phase), partner under 18
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