Income protection insurance

Income Protection Insurance (IPI) is an insurance policy, available principally in the United Kingdom and Ireland, paying benefits to policyholders who are incapacitated and hence unable to work due to illness or accident. IPI policies were formerly called Permanent Health Insurance (PHI).

Benefits

IPI policies offer a number of benefits in comparison to other insurance policies such as accident, sickness and unemployment insurance or personal accident and sickness (PAS):

• Benefits are payable when the policyholder becomes incapacitated and after the deferred period has passed and continue until the earliest of death, recovery of health, retirement or the term of the contract.
• Benefits are paid regularly (usually weekly or monthly) and are free of tax.
• The insurance company cannot cancel or refuse to renew the policy provided that the policyholder continues to pay the premiums.
• A waiver of premium option may be provided whereby premiums for the IPI policy are not required while benefits are being paid from the policy, but the policy cover continues as normal.

Restrictions

There are a number of restrictions that can affect a policyholder's eligibility for income protection insurance.

• The policies do not pay out if the policyholder becomes unemployed for a reason other than illness or accident.
• The deferred period is usually quite long, often a minimum of 4 weeks but perhaps as long as 52 weeks. Premiums decrease as the deferred period increases.
• There are a number of exclusions which apply to most policies, so that no benefits are payable for accidents or illness arising from events such as drug or alcohol abuse, criminal acts, intentional self-harm, wars and pregnancy.
• Due to the benefit limits, the maximum regular payment is usually restricted to prevent moral hazard – if the benefit exceeds the policyholder's income they have a reduced incentive to return to work once their health recovers.
• On change of occupation (or unemployment) of the policyholder the policy may become invalid, or the life office may require the premiums to be changed to reflect the new risk.
• For individual policies, as the benefits paid are not taxable income, the tax relief available to the policyholder may be reduced so, for example, tax relief on pension contributions is no longer available.