IP: The state of benefits

State benefits take into consideration the overall household: having children increases benefit entitlement, while working partners and high levels of savings reduce some benefit payments.

Employment and Support Allowance, the sickness-related benefit, also considers an individual’s ability to do any type of work, rather than their own occupation.

A 35-year-old earning a salary of £24,868 per year (the UK average) could take out an IP plan with the maximum benefit of £14,434. Following incapacity, the IP plan would pay out £277.58 per week tax free if they were unable to do their own occupation as a result of sickness. This would continue until they were fit enough to return to their own occupation or until the plan ends, which could be when they were planning to retire. Should this certainty not drive choice?

There are many factors that can influence the benefits an individual is entitled to. The number of benefits available and how an individual’s circumstances are assessed against each of them adds to determining the exact amount of total benefits they could receive. In addition, benefits change and evolve over time and with successive governments, and there can be no guarantees about what support the state will offer in future.

Let’s have a brief look at some of the state benefits that might apply.
w Statutory Sick Pay (SSP), paid at a rate of £86.70 for up to 28 weeks. This is the minimum ongoing salary an employer has to pay. Note also that self-employed people will not receive SSP.

• Employment and Support Allowance (ESA). There are two types of ESA:

• Contribution-based ESA, which is based on the National Insurance contributions paid. This would last for a maximum of one year, unless the individual is in the ‘support’ group;

• Income-related ESA. This is a means-tested benefit and an individual would have to apply for this after being in the work-related activity group for contribution-based ESA for 12 months. Payments could be reduced by ongoing earnings. This benefit offers financial support to individuals who are unable to work and support for those trying to get back into employment. There is a work capability assessment involved in this benefit, which ultimately affects how much the benefit pays per week. The individual is then placed in one of two groups if there is entitlement to ESA:

• A work-related activity group, where there will be regular interviews with an adviser, or;

• A support group, where there are no further interviews.

The amount of ESA depends on whether the individual is in the work-related group or a support group. The amount paid will usually be at the assessment rate for 13 weeks after the claim, which is up to £72.40 per week for those older than 25.

Once the assessment is complete, the payment could be increased:
• up to £101.15 a week for the work-related activity group;
• up to £108.15 a week for the support group.

Other benefits 

The number of benefits available and the degree of interaction between them adds to the difficulty in determining an exact total amount of benefit. There needs to be an awareness of benefits such as Housing Benefit, Working Tax Credit, Council Tax Benefit, Attendance Allowance, Child Benefit, Child Tax Credit and Carers Allowance. There are so many caveats that some people might start to think that the certainty provided by an IP plan makes the insurance option more attractive. Perhaps this is best illustrated by examples that consider the various key influencers:

• Earnings;
• Savings (a figure of £6,000 starts to have an impact with a figure above £16,000 restricting the benefits available);
• Benefits and pensions;
• Outgoings;
• Income and working hours of a partner.

Steve Payne is managing director of protection at Friends Life

Case study

Consider our example individual, aged 35, earning the UK average salary £24,868. This person could take out an IP plan with Friends Life with a maximum benefit of £14,434, a weekly rate of £277.58 tax free. We have used the online benefits calculator www.entitledto.co.uk to arrive at the indicative figures for the various scenarios set out in the table below. The individual suffers a sports injury and hurts their back, the consequence of which is that they are unable to work, and are not entitled to any ongoing income from their employer over and above SSP. What support would they get? NE = No Entitlement. N/A = Not Applicable (because the example used has no children)

Based on these scenarios, for some clients the welfare system will work and provide some financial support, although there can be no certainty on this. As a general indication, living with a partner who does not work, with children and no savings, produces the scenario where relying on state benefits may be more beneficial than an insured option. For others, as life itself, there is no easy answer. Some level of insurance, as opposed to none, would be beneficial. In the instances where state support will be minimal, taking out IP is a necessity. One possible solution could be to simplify the way state benefits are assessed. If it looked more at the individual, like insurers do, this could help advisers assess the best type and level of cover for their clients. But until clarity exists on the relationship between state and private benefit provision, uncertainty will remain.