REFORM

ABI WELFARE REFORM FOR THE 21ST CENTURYInteraction between IP and StateWelfareEntitlement to welfare support is subject tomeans testing – i.e. an assessment of thehousehold’s financial position and needs. Underthe current (pre Universal Credit) welfare systemincome from an IIP claim is treated as‘unearned income’. This means it is taken intoaccount in calculating entitlement to meanstestedwelfare benefits, but not in calculatingentitlement to tax credits. For every £1 ofunearned income a household receives, theylose £1 in entitlement to welfare support. GIPclaim income is treated as ‘earned income’ bythe government in assessing the individual’sentitlement to welfare benefits. For every £1 in‘earned income’ entitlement to welfare benefitsis reduced by 65 pence. Tax Credits arewithdrawn at a rate of 40 pence for every £1above a threshold, which varies according tohousehold circumstances.The key factors that determine a household’sreplacement rate from State support are:Previous earnings – i.e. the income that isbeing replaced;Young couple, healthy, both working, no children, own theirown house with a mortgage; IIP at 65%, deferred period ofone year - £18.35 per month premiumIN WORKAnnual salary: £35,000(+ partner earns £23,000)H’hold weekly income £860(£515 net earnings+£350 partner net earnings)Household weekly income £350(partner earnings – no additionalbenefit entitlement)Single, two children, owns with mortgage; IIP at 55%IN WORKAnnual salary: £44,000H’hold weekly income £655(£620 net earnings +£35 CB)POST SICKNESS WITHOUT IPPOST SICKNESS WITH IPHousehold weekly income £790(partner earnings + £440 IP payments)POST SICKNESS WITHOUT IPHousehold weekly income £350 +£35 CB)POST SICKNESS WITH IPHousehold weekly income £610(£460 IP payments + £115 TCs + £35 CB)RR41%RR91%RR53%RR93%Children;Housing tenure – i.e. renting vs. homeownership (including with a mortgage); Household savings, which are deemed bythe State to provide a source of income.The combined impact of these factors onentitlement to State support, results in widevariations in income replacement rate fromState support, even within income bands. Forexample a household that loses employmentincome of £25,000 will have a much lowerincome replacement rate if they have nochildren and a mortgage than a household thatloses the same amount of employment incomebut has children and rents their home. 3.06million households with total earnings below£50,000 have a replacement rate of 50% orlower from State support. Households wherethe principal earner has an income of £60,000or more have poor replacement rates fromState support regardless of their householdcircumstances.Under Universal Credit the impact of incomefrom an IP claim on entitlement to welfarebenefits and tax credits will change. Across theworking population as a whole, the CESImodelling and analysis estimates that incomeOlder couple, health problems, both working, no children,mortgage, savings income; IIP at 60%, deferred periodone year - £31.40 per month premiumIN WORKAnnual salary: £27,000(+ partner earns £19,000)H’hold weekly income £755(£405 net earnings + £295partner net earnings + £55savings income)replacement rates under Universal Credit will onaverage be slightly lower – 57% compared to60% now - but the variations betweenhousehold replacement rates will be greater.This is because the equivalent of Tax Credits willtake income from IIP into account in calculatingentitlement.The following CESI case studies demonstratethe range of outcomes faced by different types rate).POST SICKNESS WITHOUT IPHousehold weekly income £350(partner earnings + savings income)POST SICKNESS WITH IPHousehold weekly income £660(£310 IP payments + partner earnings+ savings income)RR47%RR87%11https://www.abi.org.uk/News/News-releases/2014/05/270-families-helped-every-day-by-Life-Critical-Illness-Income-Protection-insurance-payouts-2013abi.org.uk16