Selecting the right deferred period is among the key considerations for IP clients, writes Adam Higgs
Selecting the right deferred period is one of the most important considerations when recommending an income protection (IP) plan.
Make the period too short and the client will be paying more than they need to, too long and the cover will not start at the optimal time.
Insurers offer a range of different options, with some providing far more flexibility than others and understanding who will do what is important.
Matching the right option to the clients circumstances can help to reduce the stress felt by clients when income from their employer ceases.
Sick pay arrangements
Understanding the sick pay arrangements from a client's employer is key to ascertaining the most appropriate deferred period.
While a small amount of employers offer very generous sick pay arrangements, others will offer minimal benefits above statutory sick pay of £88.45 per week for up to 28 weeks after four consecutive days of absence due to injury or ill health.
A survey carried out by XpertHR in June 2015, using information provided by 539 organisations showed that nearly three-quarters of employer's offer sick pay schemes that are more generous than statutory sick pay.
Of the 471 organisations that provided full details of their occupational sick pay scheme, 89.4% provide a period of full pay. 20.6% of these offer four weeks full pay, while 16.4% of organisations offering eight weeks with the same proportion again offering 13 weeks.
This suggests that for more than 50% of clients a deferred period of one, two or three months is likely to be the most appropriate.
While all insurers offer both one-month and three-month deferred options, only Aviva, The Exeter, Friends Life and LV= offer a two-month deferred period.
On the other hand, 25.9% of these organisations offer full pay for less than four weeks, which means that there is a need for shorter deferred periods.
This is further extenuated when you consider self-employed people such as tradesmen where their income is likely to cease from day one if they are unable to work. In such circumstances one-day or one-week deferred periods could be considered.
Of the insurers we surveyed, only The Exeter, LV='s Personal Sick Pay plan and VitalityLife offer any of these options.
Matching the deferred period to the clients' sick pay arrangements is not always as straightforward as having one deferred period.
The XpertHR survey also showed that of the organisations offering full pay for a period, 46.7% of these go on to offer reduced pay for a set period.
While exact figures were not given, the study stated that "in many cases, organisations offer the same number of weeks at half pay as they offer at full pay", essentially highlighting the potential need for two deferred periods with increasing benefits.
In such scenarios advisers can implement a split deferred period. This can reflect the initial deferred period that will align with the length of time the employer will continue to pay the client in full: much like a standard deferred period.
The adviser can then select a secondary deferred period, during which the insurer will pay a reduced benefit.
Once the secondary period has elapsed, the plan will continue to pay out the full benefit on the assumption that the client is no longer receiving any earned income from the employer.
Being risk aware
Any client who moves to a new employer should provide advisers with an opportunity to re-assess their protection needs especially with regard to income protection.
However, there are potential risks that also apply during this period. Many employers require employees to complete an initial qualifying period before they offer sick pay benefits.
The XpertHR research showed that 30% of organisations require their employees to have completed six months of service, while 20% of organisation require three months service before entry into the sick pay scheme.
If a client falls ill during this period they are likely to find themselves under-insured as they will be without pay during their deferred period, and advisers should make their clients aware of such risks.
While matching the deferred period of an income protection plan to a client's specific needs can in some cases be a complex task, it can give the client the comfort that there will be no break in their income if they are unable to work.
As clients move through their career path the benefits they receive from their employer and their income needs will rarely remain the same.
IP plans, like all protection plans, need to be monitored regularly to ensure that it keeps pace and the deferred period applied is a vital consideration in this.
Adam Higgs is head of research, adviser services at F&TRC
