IPTM6010 - Sickness, disability, unemployment and long-term care insurance: introduction and overview

Sickness, disability, unemployment and long-term care policies

Individuals - or in some cases others such as their employers - may take out insurance to provide benefits in the event of sickness, disability or unemployment, or to pay for long- term care. Benefits may take the form of a regular income or cover expenditure, for example mortgage payments or the costs of care.

Policies to protect against sickness, disability or unemployment are usually pre-funded, that is, bought to guard against a possible future need, and are most often paid for by periodic premiums. If a claim is made, benefits are normally paid only up to retirement age.

Pre-funded policies may also be used to provide for a future need for long-term care - ‘long-term care insurance’ or ‘LTCI’. Funding may be by single or regular premiums.

LTCI also includes policies taken out to meet an immediate need for care, purchased by a lump sum payment, and home equity release annuity schemes.

Benefits from LCTI policies generally continue until death and are linked to a person’s ability to look after themselves, for example to wash, feed and move without assistance. These are commonly referred to as Activities of Daily Living (ADL). Benefit may, however, cease after a pre-determined period. A variety of policy types is available.

Benefits from such policies will be taxable as annual payments (see IM1515) in the case of sickness, disability or unemployment insurance, or annuities in the case of immediate care LTCI payable to death. There are however specific provisions that exempt the benefits from such policies in certain circumstances.

This chapter describes the two categories of policy to which an exemption may apply and the conditions to be met. See

• IPTM6100 onwards for policies that protect against a future risk of sickness, disability or unemployment
• IPTM6200 onwards for policies that meet immediate needs - immediate needs annuities.

Critical illness policies

Critical illness policies may be provided under a free standing contract of insurance or may be offered, for example, as an additional benefit under a policy of life insurance. They pay out a lump sum if the insured is struck down by one of a number of specified diseases. This could be an advantage compared with the regular income secured by other sickness policies if, for example, a person wanted to insure against the possible one-off cost of a major operation.

A payment from such a policy would not be an annuity, principally because it would not have the quality of recurrence - see IPTM1130. As such it would not be taxable as income in the hands of the recipient as an annual payment and therefore no specific provision is required to exempt it from tax.

Tax treatment in the insurer’s accounts

For details of the tax treatment in the insurer’s accounts, see the Life Assurance Manual (LAM).