Income Protection Insurance: Regulation and Taxation
Article published on 15th July 2008
Income Protection Insurance policies fall under the classification are of 'long-term insurance' and are bound by the Insurance Conduct of Business (ICOB) regulations which are set and governed by the Financial Services Authority (FSA).
The rules set out by the FSA require that all insurance companies keep records of all their accounts and contracts for 6 years at least. The same rules also allow a new policyholder up to 30 days minimum to cancel any contract they enter into (as a sort of cooling off period), after which point the customer is entitled to a full refund of all premiums paid.
Don't allow yourself to be pressured if you find yourself in the position of needing to cancel your Income Protection Insurance policy. You shouldn't face any problems, but remember that if your Insurance Company seems to be dragging its feet or giving you a hard time about cancelling your policy you are not alone and the law is on your side.
When it comes to taxes, remember that the premiums you pay for as a private individual are ineligible for tax relief. That said, premiums that your employer might pay for to provide cover for you and your work colleagues are tax deductible as a business expense and are a taxable benefit to you as an employee. However, any benefit payments released by such a policy following the contraction of an illness or an accident are free from income tax and contributions for specific policies.
In some cases a critical illness insurance policy might be a better bet than income protection insurance. It is often cheaper that an IPI policy and it pays out a tax-free lump sum if you are diagnosed with a specific 'critical' condition that is stipulated within the policy contract. There are of course many circumstances where a critical illness policy would not pay out (such as if you have a chronic spinal problem that prevents you from working) where an Income protection policy probably would, so be sure to discuss you needs in detail with a qualified advisor.
The Financial Services Authority do not regulate tax and trust planning. Levels and basis of relief are based on individual circumstances and are subject to change.
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