Selecting the right deferred period is one of the most important considerations when recommending an Income Protection plan. Insurers offer a range of different options to meet client needs. Aligning the deferred period with the client’s circumstances can help ensure continuity of income if and when money from their employer ceases. This week we consider the different deferred periods offered by insurers.

Understanding the client’s financial resilience when unable to work is key to determining the right deferred period. Advisers should consider a client’s sick pay arrangements through their employer and any savings they may have in order to determine how long they are able to cope financially before an Income Protection benefit can start.

Insurers will generally pay benefits monthly in arrears. This means that if a three-month deferred period has been selected, the client will not receive the first payment until four months have elapsed. Whilst this will usually align with how an employee might receive their salary if paid monthly, this can cause problems where a client is paid weekly. Advisers should be aware that there may be a shortfall in their client’s income for a number of weeks and make plans accordingly.

The most common deferred periods offered are 1, 2 and 3 months.

The deferred period can become a more important factor when you consider self-employed people, such as tradesmen, where their income is likely to cease from day one if they are unable to work. In such circumstances one-day or one-week deferred periods could be considered. Holloway Friendly, The Exeter, LV=’s Personal Sick Pay plan and VitalityLife all offer these options.

Split Deferred Periods

Matching the deferred period to the client’s sick pay arrangements is not always as straight forward as having one deferred period. Employers may provide a full income for a period of time and then reduce income for another period before ceasing pay altogether.

In such scenarios advisers can implement a split deferred period. This can reflect the initial deferred period that will align with the length of time the employer will continue to pay the client in full. The adviser can then select a secondary deferred period during which the insurer will pay a reduced benefit. Once the secondary period has elapsed the plan will pay out the full benefit on the assumption that the client is no longer receiving any earned income from the employer. 

Where Income Protection is recommended, regular reviews should be carried out to ensure that the level of benefits and deferred period remain suitable. This is especially relevant if a client’s employment changes.

Many employers require employees to complete an initial qualifying period before they offer sick pay benefits. If a client falls ill during this period they are likely to find themselves under-insured as they will be without pay during their deferred period and advisers should make their clients aware of such risks.

Matching the deferred period of an Income Protection plan to a client’s specific needs can in some cases be a complex task. If done correctly it can give the client the comfort that they will be able to pay their bills if they become ill and are unable to work.

Key issues to consider

·         How long will income continue once illness or disability starts?

·         Does the client have savings that can cover a period between the employer payments ending and the beginning of benefits under Income Protection after the deferred period?   

·         Does the client need a split deferred period?

·         Is the client paid weekly or monthly?

In summary, LV= and The Exeter are strong as they offer all options available with LV= offering split deferred period stretching to 12 and 24 months. Where very short deferred periods are involved Holloway Friendly, LV=, The Exeter and Vitality need to be considered.

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