27 November 2018 - John Kerr

A step towards simplification/a barrier removed

GRiD Regs Group update on DWP’s clarification of how lump sum payments interact with Universal Credit

We all know the importance of Group Life and Critical Illness cover. Now DWP has recognised the value of these products by providing clarity on the interaction of lump sum payments with Universal Credit (UC).

Under the previous rules, if someone had savings and deprived themselves of those savings in order to get a higher payment, then DWP could regard the person as still having the savings (notional capital) and reduce benefits accordingly. For example, some circumstances, such as using a life assurance benefit to pay off a mortgage early, could be caught by this rule.

In November 2018, the Building Resilient Households Group received clarification from DWP that in future a life assurance, critical illness or terminal illness benefit can be used to pay off a mortgage or other debt and this will not be considered to be deprivation of capital. This is a marked improvement on the arrangements for the outgoing working age legacy benefits and shows that the new benefits system being rolled out will allow people to use insurance payments to reduce or pay off their mortgage or any other debts.

In the retail protection market, it has been recommended that advisers should check, at the point of claim, if their client is in an area where UC has gone live. And whether the client is in receipt of a legacy benefit. Only claimants of UC, State Pension Credit and Housing Benefit for people over the qualifying age for State Pension Credit can benefit from the DWP clarification.

It has also been suggested that insurers consider signposting new claimants to advice about the UC and legacy benefit situation.

The new rules will only apply at the point where the debt is repaid so that the benefit will be treated as an asset for the period between its receipt and repayment of the debt.  

Providers and intermediaries should consider if and how this will impact their products and communications.