How Do I Make An Income Protection Claim?

Few Income Protection policies have what’s known as a waiting period or an exclusion period. This is a length of time you must hold the policy before you can claim.

As such, once the policy has gone live, if you were unfortunate enough to fall ill the very next day you would be able to claim (providing it’s for a condition your policy covers).

When you apply for cover, the insurer asks about your medical history. It then decides what it will and won’t pay out for based on your pre-existing conditions.

Providing the insurer hasn’t excluded the condition you’re claiming for due to you already having it before you took out the policy, you can make a claim almost immediately after the policy goes live.

This depends on the deferral period you chose when you arranged the cover. The deferral period is how long you wait between falling ill and the insurer paying out.

The shortest deferral periods are known as Back to Day 1 cover. Here, if you’re off work for 3 consecutive days, the insurer starts paying out and backdates the benefit to the first day of your illness.

The longest deferral periods are 52 weeks, which might be an option for workers such as doctors, who get generous NHS sick pay.

You typically align your deferral period with the amount of sick pay you get or how long you could live off your savings, keeping in mind that longer deferral periods mean cheaper premiums.

Liverpool Victoria’s (LV’s) claims data shows their average Income Protection claim length as 7 years 7 months, while for Aviva average claim length for all claims in payment in 2016 was 3 years and 16 weeks.

As you can see, the average Income Protection claim is measured in years, not weeks.

It’s possible to take out Short-Term Income Protection, which provides budget cover. However, it only pays out for either 1 or 2 years per claim. This wouldn’t be enough if you were off work indefinitely. It’s also less than the average claim length.

That’s why Drewberry tends to recommend comprehensive, Long-Term Income Protection where your budget allows. This will pay out each month right up until you retire if you become so ill you can’t ever go back to work.

Employment and Support Allowance (ESA) is one of the main government incapacity benefits. It’s designed to help with living costs and, if possible, support you to get back to work.

In most cases, you can claim ESA alongside your Income Protection benefit. However, if you’ve insured yourself for the maximum benefit an insurer will provide, some insurers deduct ongoing ESA payments from your benefit.

This is to ensure you don’t receive more in income while you’re ill than the maximum the insurer will pay out.

Eligibility for ESA depends on your circumstances and not all insurers take this approach. For further information, ask at your local Job Centre Plus or speak to one of our advisers.

No, Income Protection premiums don’t go up just because you make a claim. You can claim as many times as you need to and, with long-term cover, for as long as you need to without directly affecting your premiums.

This said, your insurer may be able to increase your premiums depending on the options you chose when you arranged the policy.

There are three different types of premiums to choose from:

Reviewable Premiums

The insurer can increase these as it sees fit each year, perhaps due to experiencing many claims from its clients or because of a difficult economy.

This can make it difficult to know how much your cover will cost each year. We therefore tend to recommend clients avoid them.

Age-Banded Premiums

With age-banded premiums, your premiums rise slightly each year in line with your age. This reflects the growing chance of you claiming as you get older.

However, the insurer can only put your premiums up by a preset, agreed figure laid out in your policy documents.

Guaranteed Premiums

Fixed for the life of the policy, your insurer cannot increase these unless you change the plan.

However, if you index-link your policy so the benefit rises annually to keep up with inflation, your premiums will also rise to compensate.

With personal Income Protection, you pay for the policy from your own individual bank account, using money you’ve earned that HMRC has already deducted tax and National Insurance contributions from.

You’ve therefore effectively already paid tax on the premiums, so HMRC doesn’t charge tax on the benefit when you make a personal Income Protection claim.

What About Cover for Directors?

If you’re a contractor or company director working through your own limited company, you have the option to take out a special type of Income Protection designed specifically for how you work.

This works slightly differently because your company pays the premiums. These premiums are typically an allowable business expense against your corporation tax bill, so you don’t therefore pay tax on the premiums for Director Income Protection.

With this type of cover, when you claim the insurer pays the money into your limited company.

It’s then up to you as the director / contractor to distribute it from there tax-efficiently in consultation with your accountant. At the point of distribution, HMRC taxes the benefit as it would your normal earnings.

As with all insurance, there are a few exclusions that apply to everyone. For example, most insurers won’t pay out for illnesses / injuries sustained:

• In the course of criminal activity
• From illegal / illicit drug use, substance abuse or alcohol misuse
• During foreign travel to areas of active internal conflict, high terrorism risk, political instability or countries the Foreign and Commonwealth Office (FCO) has advised against visiting.

Other than this, there are few other blanket reasons the insurer might not pay out. What you can and can’t claim for is entirely dependent on your pre-existing medical history.

What About Pre-Existing Conditions?

During the application, insurers ask medical questions focusing on your health, particularly in the past 5 years. If you disclose a medical condition, the insurer might:

• Cover the condition on standard terms (meaning you won’t face any difference in price or policy terms compared to a healthy individual)
• Cover the condition for an additional premium
• Exclude the condition but offer a date at which it will consider reviewing the exclusion
• Exclude that condition entirely (perhaps with a premium discount to compensate).