Changes in working patterns is causing greater fluctuations in individuals’ income during their careers. Workers are increasingly making career moves or switching to part-time roles as they grow older, which could see their income level fall. These reductions in income can put workers and their families at risk as they will likely reduce the benefits payable under their Income Protection plans.
This week we are exploring minimum benefit guarantees, which stipulate that the benefit payable upon incapacity will not fall below a certain amount. For eligible clients, this provides a safety net for those looking to make a career change.
All providers offer a minimum benefit guarantee. The Exeter and Holloway Friendly however, also offer the ability to fix the clients benefit at outset.
This allows clients to fix their benefit in return for providing financial evidence at application or soon after. In the event of a claim The Exeter will pay up to 75% of the requested benefit without requiring further evidence (as long as the person is in active employment at the time of claim). Holloway Friendly (within their STIP and one2protect plans) enable clients to guarantee up to 100% of the benefit amount with the only limit being the maximum benefit allowable under the plan which is currently £5,000 per month. Both options can be added at no additional cost.
The Exeter’s minimum benefit guarantee is provided at an additional cost. This enables clients to fix their benefit to a chosen level, up to a maximum of £1,000 per month. Clients will need to provide evidence that for the three months before claim, they were working 30+ hours per week and earning at least national minimum wage. This benefit can be paid for a maximum of 2 years.
Other providers offer a fixed Minimum Benefit Guarantee at no extra cost. If the benefit is normally payable based on the client’s earnings at point of claim but falls below this amount, the minimum benefit amount is paid instead. If the initial cover amount is less than this figure, they will pay the initial cover amount.
In addition; Aegon, Aviva and LV= also offer to pay the full benefit if the amount payable based on the client’s earnings is over 90% of the initial cover amount.
Vitality is another exception as they guarantee to pay the benefit based on the client’s earnings at the time the plan was set up. Financial evidence must be provided at this time in order for clients to be eligible.
The graph below shows the amounts which providers offer as the guaranteed amount. As the graph shows, Legal & General, LV= and Zurich offer more generous terms for those who work as doctors or surgeons.
*The Exeter also offer a fixed benefit guarantee option (see above)
Advisers should be aware that the above providers, with the exception of Aviva and Vitality, do not offer to increase their minimum guarantees with inflation however, they may grant retrospective increases at their discretion. The Exeter’s fixed benefit option and minimum benefit guarantee however, work differently. For those who choose the indexation option, their fixed benefit will increase with inflation.
If the client receives income from other sources during a claim, deductions may apply to the guaranteed amounts. As is normally the case, the deductions made will vary from provider to provider. The table below details which sources of income each provider will apply a deduction on the guarantee for.
What other income would reduce the minimum guarantee available under the plan?
To be eligible for the guarantee, most providers require the claimant to be working for a specified number of hours per week. As the graph below shows, requirements may differ between employed and self-employed individuals.
*The Exeter’s fixed benefit option (see above) does not stipulate a minimum hourly requirement but the insured person must be in active employment when a claim is made
Notably, Royal London does not require a claimant to be working in order for the guarantee to apply. However, if the claimant is working less than 16 hours per week they will need to meet Royal London’s serious illness or everyday tasks definition of incapacity for the benefit to be paid.
As more workers are also taking career breaks and switching to and from home-maker roles, periods of unemployment are more likely to occur during their career. Advisers therefore need to understand the benefits payable if a client does not meet the minimum eligibility requirements for the minimum guarantees on their plan. In such situations, the benefit payable can vary dramatically from provider to provider. This issue will be explored further in a future insight.
Overall, The Exeter, Holloway Friendly and Royal London appear to have strong propositions. The Exeter and Holloway Friendly’s fixed benefit option will be appealing to those who wish to secure as much guaranteed income as possible over a long-term. Plan holders who use this option will also not have to worry about reducing their hours, so long as they do not become unemployed.
Royal London offer the industry standard £1,500 minimum guarantee but do not require the claimant to be working a specified number of hours for the guarantee to apply. They also make fewer deductions than many of the other providers.
For doctors and surgeons, Legal & General and Zurich have a strong proposition by increasing their minimum benefit guarantee to £3,000 without increasing their minimum work hours requirement.