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HMRC internal manual

Insurance Policyholder Taxation Manual

Sickness disability and unemployment insurance: types of policies

The word ‘policy’ is used throughout the following text but it should be readto include friendly society contracts where appropriate.

Permanent Health Insurance

Permanent Health Insurance (PHI) was originally designed to enable individuals,particularly the self-employed, to protect themselves against the risk that illness ordisability might prevent them from continuing to earn a living. Some policies also helpedwith the cost of paying someone to carry out domestic duties if the policyholder’s partnerwas unable to do so because of ill health or disability.

It was called permanent because once the policy was effected the insurer was locked intoproviding cover at a set price right through to retirement age irrespective of the claimsrecord. Later insurers began to offer only policies that allowed them to review andincrease premiums at certain intervals to reflect claims experience.

Today policies may be taken out for short periods, to serve a particular need, or forlonger. For the purposes of the tax exemption the period of the policy is not relevant,but it does have relevance for the way in which the insurer is taxed on the business. Formore details on this, see the Life Assurance Manual (LAM).

Some policies only offer benefits for a limited period however long the absence from worklasts. Other policies defer benefits for a period after the person first stops work. Thelength of this period, known as the deferred period, may be determined by what otherbenefits the person can claim and for how long.

Once started, policy benefits may continue to be paid until the insured person reachesnormal retirement age, if they have not been able to resume work in the meantime. Benefitswill usually, though not always, stop at retirement age.

The earliest forms of PHI were policies taken out by individuals. Later, PHI was extendedto include group schemes taken out by employers to pay sickness benefits to theiremployees.

PHI policies are often referred to as ‘income protection’ or ‘sicknessinsurance’ policies.

Employment or income protection policies

These policies pay benefits in the event of the policyholder becoming unemployed orunable to carry on in self-employment. They are less common than PHI policies and may bereferred to by different names.

Mortgage payment protection insurance

These policies, not to be confused with mortgage protection (life insurance orendowment) policies, are designed to pay the borrower’s monthly mortgage commitmentsin the event of illness or unemployment, although usually only for a maximum period of oneor two years. They are often referred to as accident, sickness and unemployment(‘ASU’) policies.

Creditor insurance

These policies fulfil much the same economic function as mortgage payment protectioninsurance, but pay off debts on credit card and other types of loan or HP agreements inthe event of illness or unemployment. Some policies also meet outstanding commitments inthe event of the person’s death.

Further reference and feedback IPTM1013