CII R05 Critical Illness and Income Protection 2 — Questions and Answers
Question 1: What is the key difference between critical illness cover and income protection insurance?
- Critical illness pays a lump sum on diagnosis; income protection pays a regular income during inability to work (Correct answer)
- Critical illness only covers cancer; income protection covers all illnesses
- Income protection is always cheaper than critical illness cover
- Critical illness cover is only available through employers
Correct answer: Critical illness pays a lump sum on diagnosis; income protection pays a regular income during inability to work
Critical illness pays a tax-free lump sum on diagnosis of a specified condition. Income protection pays a regular income (up to a percentage of earnings) when the policyholder is unable to work due to illness or injury.
Question 2: Which type of income protection policy covers inability to work due to ANY cause, including accident and sickness?
- Accident only policy
- Accident and sickness policy
- Payment protection insurance
- Permanent health insurance (Correct answer)
Correct answer: Permanent health insurance
Permanent health insurance (PHI), now commonly called income protection, covers inability to work from any cause — illness, injury or accident — and can pay until retirement age if necessary.
Question 3: What is 'suited occupation' as a definition of disability?
- The policyholder cannot perform their exact job
- The policyholder cannot do any job suited to their education, training, and experience (Correct answer)
- The policyholder cannot do any job whatsoever
- The policyholder is hospitalised for more than 28 days
Correct answer: The policyholder cannot do any job suited to their education, training, and experience
The suited occupation definition means benefit is paid if the policyholder cannot work in any occupation suited to their qualifications, education and experience — a middle ground between own and any occupation.
Question 4: Under an income protection policy, what is the significance of the 'benefit basis' being 'indemnity' rather than 'agreed value'?
- Indemnity basis pays more than agreed value at claim
- Indemnity basis pays based on actual earnings at the time of claim, which could be less than the insured amount (Correct answer)
- Agreed value requires medical evidence at claim; indemnity does not
- There is no difference at time of claim
Correct answer: Indemnity basis pays based on actual earnings at the time of claim, which could be less than the insured amount
On an indemnity basis, the benefit is limited to the actual earnings at the time of claim. If earnings have fallen since the policy was taken out, the benefit will be reduced accordingly. Agreed value locks in the benefit at the time of application.
Question 5: A client has been unable to work for 14 months due to a serious back injury. Their income protection policy has a 52-week deferred period. Are they eligible to claim?
- No, the deferred period has not yet been met
- Yes, the 52-week deferred period has been exceeded by 2 months, so benefit should now be payable (Correct answer)
- No, back injuries are not covered by income protection
- Yes, income protection always pays from day one of disability
Correct answer: Yes, the 52-week deferred period has been exceeded by 2 months, so benefit should now be payable
The deferred period of 52 weeks means benefit commences after 52 weeks of continuous incapacity. After 14 months (approximately 60 weeks) the deferred period has passed and benefit payments should begin.
Question 6: What is 'proportionate benefit' in the context of income protection?
- A benefit that reduces as the policyholder ages
- A partial benefit paid when the policyholder returns to work on reduced hours or lower earnings (Correct answer)
- A benefit that is proportionate to the severity of the illness
- A benefit that increases in line with inflation
Correct answer: A partial benefit paid when the policyholder returns to work on reduced hours or lower earnings
Proportionate benefit (also called rehabilitation benefit) allows the policyholder to return to work part-time or at a lower salary and receive a reduced income protection payment to top up their reduced earnings.
CII R05 Critical Illness and Income Protection 2
What is the key difference between critical illness cover and income protection insurance?