CII R05 Income Protection — Questions and Answers
Question 1: What is the maximum benefit typically payable under an individual income protection policy?
- 100% of pre-incapacity gross earnings
- Up to 60% of pre-incapacity gross earnings, less any state benefits and other income (Correct answer)
- 50% of net earnings after tax
- 75% of gross earnings with no deductions
Correct answer: Up to 60% of pre-incapacity gross earnings, less any state benefits and other income
Individual income protection policies typically limit the benefit to a maximum of 50-65% of pre-incapacity gross earnings, with 60% being the most common maximum. Benefits from other sources (state incapacity benefits, employer sick pay, other policies) are usually deducted to prevent over-insurance and moral hazard.
Question 2: What is the purpose of the deferred period in an income protection policy?
- It is the period after which the policy cannot be cancelled by the insurer
- It is the waiting period between the start of incapacity and when benefit payments begin (Correct answer)
- It is the notice period required to make a claim
- It is the period during which the policyholder can change the level of cover
Correct answer: It is the waiting period between the start of incapacity and when benefit payments begin
The deferred period is the initial period of incapacity that must elapse before benefit payments commence. Common deferred periods are 4, 8, 13, 26, or 52 weeks. A longer deferred period results in lower premiums because the insurer is less likely to pay short-term claims. The deferred period should align with the policyholder's employer sick pay provision.
Question 3: An 'own occupation' definition of incapacity in an income protection policy means the claimant:
- Must be unable to perform any occupation whatsoever
- Must be unable to perform the material and substantial duties of their own specific occupation (Correct answer)
- Must be unable to perform at least three activities of daily living
- Must have been made redundant from their own occupation
Correct answer: Must be unable to perform the material and substantial duties of their own specific occupation
The 'own occupation' definition is the most favourable for the policyholder. It means the claimant qualifies for benefit if they are unable to perform the material and substantial duties of their own specific occupation at the time of claim. This is considered the gold standard definition and is generally available to those in professional or skilled occupations.
Question 4: What is the difference between a guaranteed and reviewable premium income protection policy?
- Guaranteed premiums can be increased at any time without notice; reviewable premiums are fixed
- Guaranteed premiums remain the same for the policy term; reviewable premiums can be increased by the insurer at review dates (Correct answer)
- There is no difference — all income protection premiums are guaranteed
- Reviewable premiums are always cheaper throughout the entire policy term
Correct answer: Guaranteed premiums remain the same for the policy term; reviewable premiums can be increased by the insurer at review dates
Guaranteed premiums are fixed for the duration of the policy and cannot be increased by the insurer. Reviewable premiums are initially lower but can be increased at review dates (typically every 5 years) based on the insurer's claims experience. Reviewable premiums may ultimately cost more over the policy term if the insurer increases rates significantly.
Question 5: A 'suited occupation' definition in an income protection policy means the claimant must be unable to perform:
- Only their current job role
- Any occupation suited to their education, training, and experience (Correct answer)
- Any manual occupation
- Only sedentary office work
Correct answer: Any occupation suited to their education, training, and experience
The 'suited occupation' (or 'any suited occupation') definition requires the claimant to be unable to perform any occupation that the insurer considers suited to their education, training, and experience. This is less favourable than 'own occupation' because the insurer could argue the claimant could work in a different but related role.
Question 6: Under an income protection policy, what happens to benefit payments if the claimant partially recovers and returns to work part-time?
- Benefits cease immediately as soon as any work is undertaken
- A proportionate or reduced benefit may be paid to reflect the reduced earnings (Correct answer)
- The claimant must repay all benefits received during the claim
- Benefits continue at the full rate for a further 12 months
Correct answer: A proportionate or reduced benefit may be paid to reflect the reduced earnings
Many income protection policies include a proportionate benefit or rehabilitation benefit provision. If the claimant returns to work on a part-time basis or in a lower-paid role, a reduced benefit may be paid to make up the shortfall in earnings. This encourages rehabilitation and gradual return to work rather than penalising partial recovery.
CII R05 Income Protection
What is the maximum benefit typically payable under an individual income protection policy?