What is Income Protection Insurance?
Income Protection Insurance is designed to pay you a regular monthly income if you are incapacitated and unable to work due to illness or injury. The amount of cover is based on a percentage of your gross earnings and is suitable for both employed and self-employed people. There is no limit on the number of claims you can make and, if you are never able to work again due to illness or injury, the benefit will usually be paid until the earliest of your selected retirement age or for the term of the policy if earlier.
Who can benefit from taking out Income Protection cover?
Anyone who does not get paid by their employer indefinitely when they are off sick from work should consider an Income Protection policy. Most people would not be able to maintain their standard of living if they had to rely on benefits from Statutory Sick Pay and Employment and Support Allowance (ESA) so Income Protection could form a key part of their financial protection needs. The need for Income Protection Insurance is not merely limited to those people who are employed. Self employed people for instance if off work due to illness or injury would not receive the sick pay provision that is often provided by an employer. So in actual fact it could be argued that the need for Income Protection is greater for self-employed people.
Anyone between the ages of usually 16 and 59 can apply for Income Protection cover. As the criteria for state provision of Employment and Support Allowance (ESA) becomes more stringent, it is key that individuals consider this type of cover to maintain their standard of living should long term illness or injury occur.
In what way does it differ from Accident, Sickness and Unemployment cover?
Income Protection policies, and Accident, Sickness and Unemployment policies (ASU) are both designed to replace a person's income should they become incapacitated and therefore be unable to work. However, there are some major differences between the two types of cover.
Income Protection Insurance policies are designed to provide the policyholder with a replacement income in the event of a long-term sickness or disability. Payments are usually made when the policyholder either cannot undertake their own, or any job due to illness or injury.
Accident Sickness and Unemployment (ASU) policies are a type of Payment Protection Insurance*. They are also designed to provide an income in the event of illness or injury, but they also provide cover in the event of becoming unemployed. The cover can pay out for up to two years, rather than until retirement (as is the case with Income Protection Insurance). Some ASU policies will also allow you to choose whether you want to receive benefits for accident and sickness only, unemployment only, or all three.
Income Protection will pay out a guaranteed level of income every month for as long as your incapacity continues; if necessary until your 65th birthday or when you retire. Normally, there is a maximum benefit payable from such a policy; this is usually 65% (some ASU plans are also calculated on this basis) of a person's annual income, less any benefits that they are entitled to from their employer and the state.
ASU benefits are usually payable for a maximum of 12 months. However, some policies will pay the benefit for up to two years, it all depends on the insurer. With ASU you are able to choose the amount of benefit you would like to receive (within certain limits). The premium will be calculated as a percentage of the amount of monthly benefit you would like to receive and hence the higher the amount of cover, the higher the associated premium costs.
So long as each claim is legitimate an Income Protection policy can pay out a number of times and the insurer cannot cancel the policy as long as premiums are maintained. Depending on the premium that you're prepared to pay, the monthly benefit payments can be linked to the Retail Prices Index (RPI). This means that they automatically keep pace with the official cost of living, a process known as 'inflation proofing'. ASU policies will only allow a single claim, at which point the policy will be cancelled, so you would need to re-apply to set up a new policy. You do not have the option of 'inflation proofing' such a policy. The benefit, once chosen, is fixed and if you wish to increase it then you must apply again for a new policy with a new benefit.
Should I consider this type of policy to cover my mortgage?
Accident, Sickness and Unemployment insurance (ASU) may cover you for 12 months with immediate effect from when you are off work due to an accident, becoming too sick to work or becoming unemployed.
If you return to work the policy can end and the benefit will stop. The insurer has the right to cancel the policy at any time and it is reviewable and also renewable on an annual basis. This means the insurer can cancel or increase the premium at the annual review date.
It could also be argued that another drawback of ASU is that you can only cover a percentage of your mortgage monthly repayment plus some additional costs (which will vary from insurer to insurer). This means that while your mortgage payment is covered, you may not be able to cover all of your normal outgoings.
Income Protection has a much broader long term outlook regarding its protection of your mortgage repayment. The product is flexible, incorporating a deferment period from when the benefit will start to be paid. This enables people who have employer's benefits the option of a lower premium if they wait a while before the insurance company begins to pay.
The main advantage of Income Protection over Accident, Sickness and Unemployment cover is the fact that it will pay out over a longer term, until the return to work or the designated retirement age. This will ensure that mortgages can be covered over the long term.
The maximum benefit that can be covered per month is usually 65% of gross income, less any state benefits that the policy holder may be entitled to. This enables policyholders to cover both the mortgage repayment and any other bills that they may have.
The Income Protection cover cannot be cancelled by the insurer, even after a claim has been made, meaning that some form of cover will always remain in place.
Income Protection has a much broader long term outlook regarding its protection of your income. The product is flexible; not everyone will recover within 12 months of becoming ill and be able to return to work and therefore Income Protection cover will help to ensure the maintenance of a standard of living similar to that achieved when working.
What about my occupation and the premiums for an Income Protection Plan?
The likelihood of accident or illness varies depending on what occupation you do and premiums will vary to reflect this. For example, a roofer may pay a higher premium than an office clerk due to the higher risk nature of the job. However there are specialist providers who do not charge you more for having a higher risk occupation, though commonly the benefits are lower and/or would stop or be reduced when you are able to undertake any work, rather than being able to resume your original occupation. Always read the policy documents carefully to understand the terms of the policy.
What are Deferred Periods?
A deferred period could also be called a waiting period. It is the period of time that you need to be off work due to illness or accident before your Income Protection Policy begins to pay out. This time period is selected by each individual and is normally dictated by the sickness benefits that your employer provides. Thus if you are Self Employed or receive no sickness benefits from your employer, then you will usually require a very short deferment period. Deferment periods can range between 1 day and anything up to 24 months dependent on an individual’s circumstances, it is important to bear in mind that the shorter the deferment period the more effect it will have on increasing premiums.
What affects the premium I pay?
There a number of things which can affect the premium you may pay these are such things as:-
Age, health, occupation, deferment period, benefit required and indexation.
Income protection (with no investment link) has no cash in value at any time and will cease at the end of the term. If you stop paying premiums your cover may end.
Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against the loss of income. For impartial information about insurance, please visit the website at www.moneyadviceservice.org.uk