The income protection and state benefits conundrum

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Aug 20, 2019

The impact of an income protection claim on someone’s potential state benefits can sometimes be a complicated area for both advisers and insurers discusses Andrew Simmons, Head of Business Protection at VitalityLife.

Until April 2018 it was possible to claim benefits to cover mortgage interest payments. This has since changed and, under the government’s Support for Mortgage Interest, a loan now has to be repaid with interest whenever a home is sold or transferred. 

Following the change, various industry groups have sought clarification from the Department for Work and Pensions (DWP) about whether income protection pay outs that are used for mortgage repayments would be taken into account when assessing eligibility for means-tested state benefits.

There has been agreement on some principles where an income protection claim is used to repay (or partly repay) a mortgage. If the product is intended to be used to pay the mortgage (and stated in the terms that it can be), has “mortgage” in its title, and if the benefit is being paid directly to the lender, there should be no impact on the client’s state benefits. It may also help if the reason-why letter from the adviser (and any recorded calls) make it clear the policy was intended for mortgage repayment.

It's less clear when it comes to individual cases and complications arise if the policy does not satisfy these principles but is being used to pay a mortgage anyway. This may be the case with older income protection policies that don’t include the word “mortgage”.

Advisers should document that the policy is (all or part) for mortgage payment and make sure clients are aware how income protection and state benefits work together and the risks involved. However, a balance needs to be struck as being too alarmist may stop people taking out a policy. Either way, advisers should make it clear that relying on Universal Credit is not enough and that income protection provides a vital safety net if things go wrong.

Income protection and the rental sector

There are also complications surrounding benefits in the rental sector, which opens the door for advisers to encourage renters to take out income protection.

The rental sector is growing as more people struggle to get on the housing ladder. In 2017-18, 4.5 million people were in private rented accommodation, accounting for 19% of households in the UK.

This means there are potentially millions of people who don’t realise the state won’t pay for their rent if they’re unable to work.

If the household is entitled to Universal Credit (UC) and they live in social housing their rent is normally met in full minus the “bedroom tax”. This isn’t the case for private renters, where eligible support is decided by Local Housing Allowance Rates (LHAs). The way this is calculated means the allowance is often not enough to pay the full amount of rent. Consequently, there is a widening gap between the rent households have to pay and the amount of UC they receive to pay it.

This situation provides a good opportunity for advisers to sell income protection to the rental market and means they can start having conversations with tenants, landlords and letting agents to help ensure households are protected if the worst should happen. As with the mortgage market, it’s incumbent on advisers to communicate the potential connection between income protection and state benefits, and it’s a good idea to record the fact the policy will support rental payment and living expenses.

There are both risks and opportunities when it comes to income protection, state benefits and the mortgage and rental sectors, and protection intermediaries should be aware of them so they can give their clients the best advice possible.

20/08/2019 | This article’s view is based on the law, practices and conditions as at the day of publication. While we have made every effort to ensure they are accurate, we accept no responsibility for our interpretation or any future changes. | VL O 0139

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