Income Protection and being over insured?

Wildparaplanner

Hi all,

We have a case where they appear to be over-insured when it comes to income protection.

They have a couple of personal plans set up a few years ago which appeared to be covering everything they needed. However, the company they work for has now provided them with income protection of 50% after a 12-month deferred period.

We are not overly clear how income protection policies interact with each other during a scenario of being over-insured. Which policy will pay out less than another? Does 1 policy pay out in full and then another pays the difference? Do they all pay out proportionately?

If there were no personal policies and you only had the group policy detailed above, how would you go about topping up to get fully insured?

Hope this makes sense

Thanks
Wild

benjaminfabi

It will depend but each will have a claim form that requires disclosure of the existence of other income being received/claimed.

Wordings will usually be along the lines of 'we will reduce what we pay you by the amount of any other benefits you are claiming from another policy' or 'where you are eligible to claim from more than one policy, the amount we pay you will be reduced proportionately...'

You need to look at the individual policy wordings.

In terms of the second bit it's easy for the first 12 months - either self-insure or buy a limited payout policy. More difficult after 12 months because it's something of a moving target.

I would probably look at total cost of the personal policies and assuming they're affordable, just keep them, noting that they are not going to provide the full cover paid for while in this role with this benefit. But the job could change and the group plan might not always be there, so I would be reluctant to lapse them.

Wildparaplanner

Thanks, the clients are of the opinion that they're paying a premium for a policy which potentially won't pay out in full, so they're throwing money away. Whilst I get your points around the group scheme, I think it's trying to find a balance where we can adjust policies as needed to get maximum benefit at least cost.

Spaniel_Sandal

It may be useful to have a look at a claim form (Aviva attached).

In section F it asks you to detail other insurances and the name of personal dealing with the claim. I assume they then communicate directly and arrange the split, but it may be worth contacting the existing policy provider and just ask them generically what their process is.

The existing policies should be kept if they have a shorter deferral period, and in case they change employment.

benjaminfabi

@Wildparaplanner said:
Thanks, the clients are of the opinion that they're paying a premium for a policy which potentially won't pay out in full, so they're throwing money away. Whilst I get your points around the group scheme, I think it's trying to find a balance where we can adjust policies as needed to get maximum benefit at least cost.

I pay for Sky Sports but I don't watch the NFL or the Cricket. I'm not throwing my money away though. It sounds like a framing issue and I think the clients would view it very differently if they needed to claim.

Also the existing policies are almost certainly £x from onset of claim capped at n% of income, rather than % of salary. Which means if income goes up by more than any increase mechanism, the overall potential pay out is increasing/pay out limit is reducing each year a claim isn't needed.