Protection Plans and means tested benefits.

What are means tested benefits?

An individual can claim means tested benefits if they can demonstrate their income and capital are below a certain level. During the process both the individual and their partner’s financial circumstances (income, savings, and other capital) will be looked at to determine whether they qualify.

What are the main means tested benefits?

• Council Tax Support
• Housing Benefit
• Income Support
• Pension Credit
• Universal Credit
• Income based Jobseeker’s Allowance
• Income related Employment and Support allowance
• Child Tax Credit
• Working Tax Credit

What benefits are not means tested?

• Attendance Allowance
• Bereavement Support Payment
• Carer's Allowance
• Disability Living Allowance
• New style jobseeker’s allowance
• New style Employment and Support Allowance
• Personal Independence Payment
• State Pension

How will lump sum payouts from protection plans be assessed?

Our understanding is that any part of a lump sum payout during an individual’s lifetime, for example, terminal illness and critical illness, which isn’t used to cover a debt, will be assessed as capital. These lump sum payouts can also include children critical illness and fracture cover.

The individual will need to report this payout to the Department for Work and Pensions (DWP) and how the payout will be used. The DWP will confirm whether the payout will be included or excluded from the benefit assessment and may require evidence to back up the claim that it is being used to pay off a debt.

Remember DWP guidance states that an individual cannot undertake unreasonable spending to continue to receive means tested benefits. For example, an individual cannot give the money away or decide to buy possessions that are excluded from means testing, for example, cars and jewellery.

How will regular payments from protection plans be assessed?

Regular payments, for example, income from income protection plans will be assessed as income. This means these regular payments can affect an individual’s entitlement to means tested benefits and must be reported to the DWP.

Similarly, like the lump sum payouts, our understanding is, if the income is used to cover an outgoing debt, for example, a mortgage then it will be excluded from any means tested assessment.

Under some protection plans the individual can decide to take the critical illness payout as a regular income. And whilst this is still included in any means tested assessment (unless used to pay off a debt) it may be more beneficial than receiving a large lump sum that would mean the individual’s savings is over the current levels.

What happens when an individual’s loved one receives a payout from a protection plan?

When an individual dies the protection plan can payout a lump sum death benefit and under some protection plans regular payments can be made to an individual’s loved ones (family income benefit).

Where the beneficiary who receives the payout is in receipt of a means tested benefit the capital or income will need to be reported to the DWP for the DWP to determine whether it is included or excluded in respect of their benefit claim.

What if the protection plan is written in a discretionary trust?

If the individual had placed the protection plan under a discretionary trust any payout, on death, would be paid to the trustees. The trustees can then decide who is entitled to any money, how much they are entitled to and when they receive it. A beneficiary is only entitled to the money once the trustees decide to pay them.

Having this flexibility can help in a situation where a beneficiary is receiving means tested benefits. The trustees can decide to only distribute a certain amount of capital to make sure the beneficiary remains below the threshold for means tested benefits can could even delay giving them money.