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Case Study # 2 – Welfare Reform Act 2007 - Income Protection brought into focus

This Case Study explains the options in the Income Protection (IPP) arena in the wake of the Welfare Reform Act 2007, including why you don’t have to be working to protect your Income, offsetting the costs for directors of limited companies and the tax free status of IPP payments.

Behind all future financial planning – whether you realise it or not! - exists the assumption that moving forward you will receive your annual salary, whilst also assuming that it will increase each year. However, only 12% of the working population has IP cover!

The situation regarding income protection is to be exacerbated in April 2008 by the government’s changes to Incapacity Benefit implemented in the Welfare Reform Act 2007. The existing State Incapacity Benefit is to be replaced by a more rigid ‘Employment and Support Allowance’. This aims to return people to work more quickly using a new 13-week assessment which is generally expected to make it more difficult to continue to receive payments and there is also the possibility that some claimants may be worse off in the actual amount received. This potentially stricter stance highlights the need for personal provision to be taken.

Income Protection aims to replace your salary in the event of you being ill and unable to work for a specified period. This may be 4, 13, 26 or 52 weeks and the specified level of cover – usually 50% of gross salary – will then be paid tax-free until the specified end date – Age 60, for example. Whilst not wanted, this does give the opportunity for a massive payout. These policies are thoroughly underwritten upfront and do provide comprehensive cover in the event of long term illness.

According to the Office for National Statistics, there is a 1 in 6 chance of you suffering from a long term illness that prevents you from earning for longer than 6 months. Do you have sufficient savings to cover all of your outgoings for 6 months? This would be a massive burden to place on household finances.

It has been estimated that the costs of a Houseperson is around £15,000 p.a. and childcare should also be taken into account. Recognising this, insurance companies now have available House Persons cover. Contact Me for a personalised illustration and discussion of your options.

For example, what you can expect to pay and possibly receive? A 30 year old male office worker, healthy non-smoker, choosing a monthly benefit of £1500, deferment of 13 weeks and ceasing at 60 will pay a premium of £27.19 pm. Assuming an annual increase of 2.5% (in line with the Retail Price Index*) this policy could payout over £800,000 over the course of a 30 year claim if he suffered illness or accidental injury and was unable to return to work.
Directors of Limited Companies can look to minimise the impact of long term illness on their company. Executive Income Protection premiums can be offset against Corporation Tax and the policy benefits will be paid to the firm as a Trading Receipt. They may then be used to fund an extended Sick Pay policy to replace an employee’s salary. You can cover up to 75% less State Benefits and also include NI and Pension contributions,

Deciding to protect what is essentially your greatest asset can be the best plan of all….

Recommended links - http://www.dwp.gov.uk/whatsnew/

*Under current UK tax rules 04/2007. The Retail Price Index is a statistical measure which tracks the prices of a specified set of consumer goods and services, providing a measure of inflation (Wikipedia, 04/2007).

Independent James are authorised and regulated by the Financial Services Authority – ref: 459851. This covers residential mortgages, general insurance and pure protection. We typically charge a fee for our advice, payable upon completion dependent on complexity of advice but on average £300.