Family income benefit is currently a little used product but it could prove a ready replacement for the benefits lost due to the reform.
More emphasis on renters?
The new benefit cap, which limits the total amount that can be paid out for many benefits, could have a significant impact on anyone who rents their home.
The benefits cap was reduced in November last year and means that benefits are limited to no more than £442 a week in London and no more than £385 a week for the rest of the UK. Any amount over this is recovered from Housing Benefit or Universal Credit.
In addition, there are restrictions on the size of rental properties that are eligible for housing support, and Housing Benefit is limited to the Local Housing Allowance figure, which is based on the 30 per cent of the cheapest properties available in an individual’s local authority area.
The high cost of renting in some areas means many people are likely to hit the cap and have to deal with a shortfall.
Mr Timpson says: “Renters are not prompted by a house purchase to look at how they and their families would manage financially if they were to die or become seriously ill. But while they don’t have a mortgage to pay, they still have financial obligations, not least the monthly rent and regular household bills.
“Many renters assume they can rely on benefits, but welfare reform means that fewer of them would get their rent paid in full if their circumstances changed without warning.”
Impact of IP on means-tested benefits
While there are opportunities for the protection industry to fill the financial gaps left by the benefits system, there are also pitfalls that advisers need to be aware of.
The overriding pitfall is that an IP claim payment may impact upon an individual’s entitlement to means-tested state benefits, such as income-related ESA but not contribution based ESA, which is based on NICs paid.
In the latter case, two tests apply: Test 1, in one of the last two full tax years the individual must have paid Class 1 or 2 NIC’s on relevant earnings for at least 26 weeks; and Test 2, in both the last two tax years, the individual must have been credited with class 1 or 2 contributions to the value of 50 times the lower earnings level.
Some insurers’ benefit definitions may take ESA into account and if the client is insured to the maximum level will reduce the level of insurance paid by ESA. The rationale for this being that the amount of IP claim benefit and ESA combined should be less than the level of pre-claim income.
