The Department of Work and Pension has clarified that payouts from protection policies – including income protection, critical illness or terminal illness policies – will not impact on means-testing for Universal Credit.
This clarification has been welcomed by the insurance industry, who were seeking further information of this issue, via the Building Resilient Households Group.
This group said the DWP update made it clear that if a person has used their capital to pay off or reduce debts – including a mortgage – they would not be treated as depriving themselves of that capital.
BRHG chair Richard Walsh says: “Once the capital has been used to pay off a debt it will no longer be taken into account in the assessment of entitlement for Universal Credit.
“This is a market improvement on the arrangements for the outgoing working-age legacy benefits.”
However, LV= head of protection policy Justin Harper adds: “Universal Credit is far reaching and has implications for all types of protection insurance, not just income protection.
While a positive step, this clarification has ’duty of care’ implications for both advisers and insurers.”
He says for advisers, the principle of making your own financial provision against life shocks remains absolutely relevant to give customers peace of mind. Although benefits from the welfare system are gradually rolling back, they cannot be ignored completely.
“When making any protection recommendation, particularly alongside a mortgage, we recommend advisers discuss and document the ‘private vs state provision’ principle, where a policy is intended to repay a mortgage, and that the protection policy may have consequences for eligibility or amounts available from state benefits.”
He adds: “At the claim stage too, advisers have a role to play in offering guidance and advice in light of the changing financial circumstances of their customer, and considerations for spending any insurance payout.”
He says LV= is developing its support services to accommodate the latest clarification, as well as introducing a ‘Pay My Mortgage’ facility for new income protection policy claimants.”