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What is income protection?
Income protection is a type of insurance policy that pays out if you're unable to work for any medical reason.
When you buy income protection insurance, you make monthly repayments (the premium) in return for a tax-free monthly payment (the benefit) if you make a claim.
Long-term back pain, cancer, depression and strokes are a few reasons why people may claim on their income protection insurance, and you can make multiple claims during the term of the policy. The cover protects you financially in a longer-term way than sick pay.
Our team have helped many people to find the perfect cover for them, whether it is life insurance, critical illness cover, income protection, or a combination of all three. Contact us today and one of our advisors will be in touch.
How does income protection work?
When considering income protection, several variables affect your monthly premium.
- The monthly benefit amount in the event of a successful claim, typically up to 55% of your pre-tax income.
- How long the benefits will be paid - there are short and long term policies available.
- Whether the benefit amount stays the same or increases over time.
- The term of the policy, which can be for an agreed number of years or until retirement.
- Whether the premiums are:
- Guaranteed - where you pay a set amount each month, or increasing with inflation only. This is the recommended type of premium.
- Reviewable - where the monthly premiums are subject to other increases.
- The waiting or deferred period, that is, how long you have to wait before your payments start. Generally, the waiting periods are 1, 4, 8, 13, 26 or 52 weeks, and the longer the deferred period, the lower the monthly premium. Be mindful that you may not have any other income during this time if you are unable to work, so you may be reliant on a partner or eroding savings.
- Your age, medical history and whether you are smoker will also affect your monthly premium.
Short-term vs long-term income protection
One choice you will have when choosing income protection is whether to go for a short or long-term policy.
Short-term income protection
With short-term income protection, you are protected for a shorter amount of time, with a maximum amount of time per claim when you will receive the monthly benefits. This is typically between 2 to 5 years per claim, and you can claim multiple times on the same policy even if the injury or illness is related to the original application. Short-term income protection is cheaper than long-term cover.
Long-term income protection
Long-term income protection means the period during which you receive benefits is the length of the policy term. This means you will continue to receive payments for the duration, assuming you are still eligible. As with short-term cover, you can make multiple claims during the term.
What if I'm over 50?
The typical maximum age for taking out income protection insurance is between 54 and 64.
The policy can then run until retirement age, with some insurers in the UK offering cover past 68 years old.
How are income protection claims assessed?
The majority of unsuccessful income protection claims are due to 'misrepresentation' when taking out a policy; you must be honest with the information you provide to avoid an unsuccessful application in the future.
When assessing an income protection claim, insurers consider the application based on your inability to fulfil the duties of your job - known as their 'definition of incapacity'. This varies significantly based on the nature of your role, for example, how physical or stressful it is, and feeds into what your insurer calls your 'own occupation definition'.
Should you be unemployed at the time of making your claim, there will be other factors that are considered, for example, whether or not you can use a car or your ability to walk. This is known as the ADL or 'activities of daily living' definition. Income protection cover doesn't take into account any loss of earnings that are not due to the injury or illness, for example, if you are made redundant.
You may find that there are other exclusions in your policy, for example, inability to work due to self-harm, or other items that are specific to your own medical history.
Do I need income protection insurance?
There are a few questions to ask yourself when considering income protection insurance.
- Do you rely on your salary for day to day living expenses, for example, to pay for the mortgage or bills
- Could you afford to carry on covering these expenses if you are unable to work due to illness or injury
- What sort of sick pay entitlements do you have from your employer, how long can you rely on this. Statutory sick pay in the UK is currently £94/week for up to 28 weeks in the UK.
- Do you have savings or any other income that you can rely on?
- Could you reduce your expenses while you are incapable of working?
When is the best time to get income protection?
Certain triggers encourage people to consider income protection insurance; however, the younger and healthier you are, the cheaper your cover will be.
Common reasons include:
- Taking on a mortgage, getting married, entering into a civil partnership or having a child.
- Becoming self-employed for the first time.
- Personal experience, ie, where a friend or relative cannot work due to illness or injury and struggles financially.
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Income Protection for the self-employed
Income protection cover may be more significant for the self-employed who do not have employer-provided sick pay.
If you are self-employed and are unable to work due to illness or injury, you may feel the financial impact sooner than those who are in employment.
Income protection or critical illness cover?
It is common to confuse income protection with critical illness cover; however, there are some key differences:
Critical illness cover
- Has a pre-defined list of conditions and illnesses that you are covered for
- Provides a lump sum payout that can support you and your family financially through a difficult time.
Income protection
- Pays out if you are unable to perform your job for any medical reason. This is not a defined list, rather, anything medical that impacts on your ability to work.
- Pays out a proportion of your salary on a monthly basis.
How can I learn more?
Our team of experienced advisors can help you to find the cover that is perfect for you and your circumstances. Get in touch today to get started.
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