Income protection policy holders who need to claim Universal Credit (UC) should not be penalised for buying such a policy.
This is according to the Association of British Insurers (ABI) who are calling on the interaction between social security benefits and insurance to be reformed to make sure people are not penalised for purchasing an income protection policy, should they fall ill and subsequently need to claim Universal Credit.
In its report titled Futureproofing Workplace Health, commissioned by the Association of British Insurers (ABI) and carried out by WPI Economics, the ABI explains the issue is connected to the fact that any money claimed from individual income protection results in Universal Credit being withdrawn on a £1 for £1 basis.
It adds as this is treated as unearned income, this acts as a disincentive for low to middle earners to take up Individual Income Protection (IIP).
Supporting its argument, the ABI cites research from the New Policy Institute in 2019 which suggest that 39% of all current IIP policyholders would face their entire entitlement to UC (absent them having IIP) being removed if they claimed on their IIP policy.
Not just for the middle class
They also found that two-thirds of IIP policyholders earn between £10,000 and £40,000 per year, disproving the idea that these products are just for the middle classes and high earners.
It adds it has been proposed that this issue is addressed by reducing the taper rate to the same as earned income in Universal Credit, which is 55%.
The ABI argues this policy could help boost take-up of IIP by reducing real or perceived disincentives to lower- and middle-income policyholders, particularly the self-employed, who may otherwise be financially vulnerable.
It adds the policy would represent a business benefit as it would result in greater access to return to work services, which deliver benefits to business as per the ABI’s economic analysis, while only coming at a cost to individuals rather than firms.
It concludes at present, the issue is widely recognised by industry but not yet addressed by government
Other recommendations
This key recommendation appears among a number of other ABI recommendations that the body said government should take forward to improve workplace health.
These include:
- Reform Statutory Sick Pay (SSP) so that it provides better and more flexible financial support for employees and encourages employers to provide effective and proactive sickness absence management.
- Any new incentives flowing from the recent government consultations must allow employers to offer workplace health benefits in the way that works best for them, and also apply to insurance.
- Reform the interaction between social security benefits and insurance to make sure people are not penalised for purchasing an income protection policy should they fall out of work and subsequently need to claim Universal Credit.
- A move towards mandating firms to disclose information on how well they support the health and wellbeing of their staff. In the longer-term this could help to incentivise more companies to play an even greater role in supporting healthy working lives.
By bringing in these measures, the ABI argued government would enable a much larger group of people to benefit from health and protection insurance.
“Increasing the number of employers who offer this support to their employees would improve health and wellbeing across the nation, as well as provide benefits to business, the exchequer and the wider economy,” it added.
“If the number of people with these benefits doubled, it would be worth £800m to businesses, the economy and exchequer in the first year alone,” the ABI continued.
“We estimate that, by the fifth year, this would equate to 165,000 more people in work and 28 million days of sickness absence avoided.
“Combined with the existing impact of insurer-provided services, the total benefits could be as high as £12.2 billion per year.”
The ABI concluded by saying: “The social and economic dividends attached to take-up of health and protection cover create an imperative for bold and transformative action to broaden access to this kind of support.
“In the longer term, it is critical that government, industry, employers, and broader stakeholders work together to ensure a basic level of workplace health support for the vast majority of people.”