If you read nothing else, read this . . .
- Limited-term income protection policies are a cheaper alternative to traditional products that pay through to retirement by offering a set payment period, such as two, three or five years.
Limited-term group income protection policies can provide a cheaper alternative for employers, says Jennifer Paterson
Limited-term group income protection products are a cheaper alternative to traditional policies which pay out to retirement if an employee is unable to work. Instead limited-term policies pay out for a set period, typically two, three or five years. These levels can be increased with a lump-sum payment, also known as a capital option, of up to five times the annual benefit payable at the end of the set payment period.
On average, premiums on limited-term products for employers are reduced by 40-45% on a plan that pays out for five years and 65% on one that pays out for two. Steve Browning, group risk protection manager at Friends Provident, says: "It is no great surprise employers are focusing on cost reduction. They are looking for good-value policies and putting weight on added-value services."
Paul Avis, director of sales and marketing at Canada Life, cites the example of an organisation with 89 staff, for which a fully-insured group income protection scheme cost 1.2% of payroll, while a limited-term policy was just 0.26%. "While the benefit payment period is not the only difference here, it is one of a range of budget options," says Avis.
Limited-term products also tie in with a change of direction in the market. Income protection is traditionally seen as a relatively safe but unexciting benefit. Now the focus for many employers is on early notification of absence and the use of rehabilitation support to help staff return to work. Glenn Laming, group protection sales director at Legal and General, says: "What the employer is buying now is a much more preventative policy to minimise the time an individual is absent from work, which is then backed up by financial support offered through the payment for those who are unable to return to work."
No more jobs for life
Limited-term products also tie in with staff no longer expecting a job for life. David Kay, commercial product manager at Unum, says: "The average duration an employee works for a specific employer now tends to be short. A lot of employers will feel that a product that pays benefits right through to age 65 is not what they need."
Despite the difference in cost, limited-term and traditional income protection products are set up in exactly the same way when it comes to services. "On the face of it, the product and the claims services are identical," says Browning. "Employers can have all the same options - different deferred periods and different definitions of incapacity."
Employers should also consider how a limited-term product will fit with their perks package. Laming says: "If [employers] choose to go from an unlimited term [benefit] down to two years, they need a clear understanding of what will happen with that individual, what level of support will be provided once the two-year period ends, and that there are options around providing a lump-sum payment at the end of the period."
One option is to close existing income protection plans for new joiners and offer a limited-term option. "Employers are padding future costs as people leave and new joiners come in," says Ford. "The cost of provision is kept down so it is no longer ever-increasing."
Effect of legislative changes
Legislative changes will affect the market. For example, the potential removal of the default retirement age has given momentum to limited-term income protection policies. Catherine Baxter, product manager at Bupa Group Risk, says: "One reason limited-term benefits have been growing in popularity is concerns about age discrimination legislation. They would help to contain the cost and the liability to the employer if challenged."
Steve Bridger, head of group risk at Aviva, adds: "About 80-90% of schemes are insured to normal retirement age. If that age was removed, it becomes an open-ended statement. The ability to manage the claim and make the liability more understood would make limited-term more beneficial."
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