Over half of individual income protection customers estimated to have entitlement to Universal Credit however 36% would have it removed because of their policy
The Association of British Insurers (ABI) has called on the Department of Work & Pensions (DWP) to provide insurers with a better understanding of the potential interaction between individual income protection (IP) and Universal Credit (UC).
In November last year, we reported that the DWP had clarified that term life, critical illness and terminal illness insurance would not impact UC means-testing.
While entitlement to UC does not impact on the amount of any IP payment made to the policyholder, an ABI-commissioned report by the New Policy Institute has pointed out that it can have a significant impact on the net value of the payment, as it can reduce, or in some cases disqualify, UC entitlement.
After sampling 370,000 IP policyholders across four insurers, the study found that four in five were under the age of 45, two-thirds earned between £10,000 and £40,000, with the majority being homeowners with mortgages or tenants.
It found that over half of those with an IP policy (54%) would be entitled to UC if they did not have a policy, if unable to work because of sickness or injury. Therefore if they continued to hold the policy, it would be eroded pound for pound either completely or in a reduced manner because of the disregard.
The report also revealed that 39% of policyholders would continue to be entitled to UC alongside their UP and the 15% continue to be entitled to UC alongside their IP policy.
The potential of IP to serve as an alternative to statutory sick pay (SSP) for those who are self-employed may be limited by the different treatments under UC.
"It is in the interests of government, employers and insurers to offer financial support and services to workers through periods of sickness or injury, and to help and incentivise them back to work," said Roshani Hewa, ABI assistant director, head of protection and health. "However, this report highlights that some individual income protection policyholders and potential customers, face uncertainty over what the future value of their policy may be if they need to claim on it. We need to ensure we have a system that encourages financial resilience through the take up of products like income protection. Any retreat from this cover would push up public spending on social security.
"The findings of this report will help the government and the insurance industry better understand how to ensure that income protection cover is always of benefit to customers."
Dr Peter Kenway, NPI's director added: "The finding that some policyholders may be no better off with IIP than if they had just relied on UC is a conclusion about the short term. The danger in it is that the long-term conclusion may be quite different. UC is not well-suited to people who cannot work for a lengthy period. As a means-tested benefit for the whole household, it is inevitable that UC should be unstable and contain disincentives to earn and save.
"Insurance-based products, by contrast, whether from private providers or the state (through national insurance), do not carry these disadvantages and are therefore more conducive to financial resilience."
The full report can be found here.
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