My self-employed client declared that his wife was a 'sleeping partner' in the business for tax purposes. Now he has come to claim on his IP he is only being paid 50% of the benefit, even though his wife does not work. Where does he stand?
Whether or not your client is entitled to the full benefit ultimately depends on the specific terms of the contract and how strictly the insurer concerned interprets them. However, what this does highlight is the need for such issues to be raised and agreed with the insurer at the underwriting stage, not left until a claim occurs.
I can only comment on the practices of my own company, but this decision does appear to be harsh, as this accounting approach is very common. Where a self-employed person splits the business profits with their spouse purely for tax purposes, my company is happy to base cover on the total net profit. At the point of application, we would seek written confirmation that the insured person was 'the sole generator of income to the business and that in the event of their incapacity income from the business would cease'. The reason for this is that the definition of self-employed earnings refers to the insured person's share of pre-tax profits, therefore we need to update our records to show we have agreed to expand the definition to include profits paid to the spouse.
The ABI Statement of Best Practice for Income Protection, introduced last year requires insurers to be clear on such issues in the key features document and makes clear reference to share of profits. This should ensure that in future such issues are highlighted and agreed at the underwriting stage, avoiding potential disputes at a later date.
