Returning to work – Proportionate Benefit

Written by Tom Salmon, Senior Claims Assessor at Pacific Life Re with supporting comment from Phil Deacon, Director at Phil Deacon Consulting Ltd

Many claimants are hesitant to return to work gradually because they worry that their Income Protection benefit will simply stop. However, one of the benefits of IP is that it continues to support the claimant with a proportionate benefit as they start a graded return to work (GRTW) programme. There are two common methods for calculating this benefit:

This method adjusts the benefit being paid based on how much income a claimant receives when they start their return to work compared to their pre-disability income (PDI). For example, assuming the following:

• PDI: £50,000 per annum
• Continuing Income from return to work: £20,000 per annum
• Maximum Benefit/Sum Assured: £32,500 per annum

The formula to calculate the proportionate benefit is:

Applying the numbers:

This amounts to a reduced IP benefit of £1,625 per month. However, when combined with the new earnings from returning to work, the claimant is better off providing a clear incentive to return to work. This calculation can be updated as each payslip is received, until the claimant returns to full-time hours or medical evidence indicates that the claimant is fit to resume full-time work.

Alternatively, the proportionate benefit can be determined by comparing the number of hours performed after the claimant returns to work to the pre-disability hours. For example, if the insured is working 50% of their pre-disability hours, then they would receive 50% of the Maximum Benefit or Sum Assured. This method links the benefit directly to the reduction in working time compared to their pre-disability hours, providing a straightforward and easily verifiable calculation. This method is more likely to be used for self-employed people, whereby determining earnings from the return to work isn’t always as easy or as immediately apparent. Of course, for self-employed people it may take a while to build-up new income streams again and insurers should also consider this when determining how much benefit to pay when a claimant returns to work.  To ensure that the correct level of benefit has been paid the insurer will also request any accounts/tax returns when they become available.

Proportionate benefits are an essential part of an Income Protection policy and their importance goes far beyond just the financial value. They help to financially underpin the very prospect of a return to work, and the many benefits that this brings for the claimant. It allows the claimant to engage with vocational rehabilitation programmes and other efforts to support a return to work without having to worry about being financially worse off.

The financial aspects of Income protection – net profit, dividends, tax returns, accounts – can be a bit of a dry topic at the best of times. But it’s crucial that customers understand how their policies work and what they’re covered for so there are no nasty surprises when they come to claim. Tom was really passionate about the importance of education when it comes to Income protection, and advisers and insurers certainly need to do more to manage customer expectations and educate them around how their policies work.

Many insurers have taken up this challenge, using plain English to help provide transparency and increase understanding. Lots now take a more flexible approach to calculating earnings and many policies now include features like a minimum benefit guarantee while some even allow customers to fix their income within the first months of cover, meaning this will be used at claim stage even if their actual earnings at the point of claim have decreased.

As Tom highlights in his article, annual statements are key for reminding customers not just about what cover they have, but the level of earnings required to justify a full pay-out if they have IP.  By copying the adviser into these, they can act as a trigger for a financial review, making sure the cover they have is still relevant and meets their protection needs. This ultimately should lead to better customer outcomes and so a failure to issue annual statements, and copy in the adviser where relevant, could be seen as a failing of Consumer Duty.

Tom also mentions budget IP, where payment terms are typically limited to 1, 2, 3 or 5 years, and this has undoubtedly been a success story in terms of getting more people covered and growing Income Protection sales, with around 50% of all sales now featuring a limited payment term. However, the Industry needs to be cautious in so far that customers reaching the end of those limited claim periods without being able to return to work could suffer significant financial hardship unless they have an alternative financial safety net in place. Advisers selling budget IP need to think about how else they can help customers protect against long-term work absence while insurers should be focusing on solutions that can help customers achieve an early return to work, and if that’s not possible, help them prepare and adapt to this financial shock.

Income protection isn’t just another line in the protection insurance toolkit – it’s the safety net that keeps everything else in place. Mortgage and rent payments, food and utility bills, savings goals, and even things like school fees, they all rely on an uninterrupted income in the event that somebody becomes too ill to work. Without it, the best-laid financial plans can unravel very quickly. The real strength of IP comes from setting it up correctly in the first place making sure the benefit is aligned to the client’s earnings and reviewing it regularly, so it stays aligned with their changing circumstances. By making IP the foundation of every protection conversation, and ensuring their clients are accurately covered, advisers are safeguarding their clients’ livelihoods, stability, and peace of mind for whatever life throws their way.