Some firms are incorrectly calculating the amount of benefit income protection policyholders should receive after successfully submitting a claim, according to the Financial Ombudsman Service (Fos).
The Fos says in some of the disputes it sees involving income protection policies, policyholders are unhappy with the amount of benefit they receive after successfully submitting a claim.
Often the problem stems from the policyholder’s misunderstanding about how the policy works, but sometimes the firm has calculated the benefit incorrectly.
If the Fos is satisfied the calculation is correct, it may examine the advice the firm gave at the time it sold the policy and, in particular, it will look at whether the policyholder was over- or under-insured.
It will also examine any fact find or other document relating to the policyholder’s financial circumstances, demands and needs at the time of the sale, and it will look at any policy brochures and marketing information given to the policyholder before they took out the insurance.
For example, where the insured benefit is subject to options that could increase the benefit, then if there is any ambiguity in the policy about how such increases operate, it may consider what the firm told the policyholder at the time they entered into the contract.
Disputes can sometimes arise if a self-employed policyholder believes – in basing its assessment on net profit rather than on some other factor, such as turnover – the firm has calculated benefit incorrectly.
In such cases the Fos will always examine the policy in question because the status of elements such as benefits-in-kind, bonuses, commission, “drawings” and dividend payments can very considerably between policies.
A policyholder’s earnings are usually assessed on the basis of their average income over the 12 months before they became incapacitated but the Fos says this can sometimes produce harsh results.
For example, it may know from medical evidence that the policyholder’s condition worsened progressively over a period of time, during which they struggled to continue working.
A harsh result can also arise where a policyholder’s income fluctuates, for example when their earnings depend on commission.
The Ombudsman states a fair and reasonable approach would be to take an average of their earnings over a longer period, for example three years, unless the policy clearly restricts this.
When calculating the amount of benefit payable, some policies deduct any income the policyholder receives from other insurances so the policyholder may not realise, until they make a claim, they have been paying for a policy that provides little – if any – benefit.
In such cases, the Fos will look at the circumstances surrounding the other policies (often a form of payment protection insurance), which may help it establish if the policyholder (or the firm or intermediary) was aware the risk was already wholly or partially covered by another policy.
It will also check whether the income protection policy makes it clear the firm will make the deduction.
The Fos’s approach is to interpret any ambiguity in the policy wording in favour of the policyholder so unless the policy clearly shows what other types of insurance payments will be deducted from the benefit, it will not interpret any clause purporting to deduct income from other “similar” policies as including payment protection policies.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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