Getting protection insurance might be low on your priority list, but it could be a lifesaver if you need to take time off work due to ill health. What is income protection insurance and is it right for you? Our guide is here to help you.
What is an income protection insurance policy?
If you are unable to work due to illness or injury, an income protection policy will pay you a regular income until you return to work or decide to retire. It is also known as permanent health insurance.
How does income protection insurance work?
Income protection policies are designed to provide you with a monthly payment while you are away from work due to illness. Income protection insurance pays up to 70% of your usual monthly income, depending on the policy chosen. Your payments can start as early as four weeks after your first date of absence or up to two years later.
You may be wondering why you can’t claim 100% of your normal income. This is mainly because the payments are tax free. If you pay the monthly premiums yourself, you’ve already paid income tax on that money, so you won’t be taxed again. You will be taxed if your employer provided insurance as part of your employee benefits package. The monthly payment from your insurance is also lower because you may be entitled to sick leave or benefits.
Your payment start date can be fixed so that it starts when your sick pay runs out. Some employers keep you on full sick pay for a while, while others will put you on statutory sick pay straight away.
Is Income Protection Insurance Right For You?
Here’s what Koji? had to say ‘The one protection policy every working adult in the UK should consider is the one most of us don’t have – income protection.’
Income protection insurance covers up to 70% of your income when you cannot work due to a medical condition. Most of us would struggle to pay the bills if we had to take a significant pay cut due to illness or injury. However, it is also important to consider your options before deciding to purchase income protection insurance.
Do you have savings?
If you have savings, you can rely on them to pay bills while you’re away from work. However, if your illness or injury ends up causing you to be away from work for an extended period of time, you may find that you’ve used up your savings sooner than you expected. It is important to have an alternative plan.
Do you already have income protection through another policy?
Some insurance policies include income protection that pays out in certain circumstances. For example, you may have insurance as part of your mortgage that covers your mortgage payments if you become ill. You may also have insurance that covers outstanding loans. Although you may still need income protection insurance to cover other expenses, you may be able to choose a lower level of cover and lower your monthly premium.
Does your employer provide you with income protection?
Your employer may already provide you with income protection. However, you will only benefit from this while you are still employed. It’s still worth taking out your own policy to keep you covered even if you decide to change jobs.
Advantages of taking out income protection insurance
An income protection insurance policy can provide you with long-term income protection that will pay out after 28 weeks of statutory sick pay entitlement and longer than other short-term income protection policies.
Bill payment
Income protection insurance offers peace of mind, knowing that your mortgage, rent and other essential expenses are covered, even if you are away from work for more than a year.
Other loans and financial obligations
You may already have some form of mortgage payment insurance, car loan payment protection insurance or other hire purchase agreements. However, if you don’t, your income protection policy can continue to make payments, meaning you’ll avoid defaulting or paying extra interest.
Maintaining the quality of life
Even if you have poor health and are limited in your daily activities, your quality of life is still important, and you can use your monthly payments to invest in the things you enjoy. If your illness or injury results in disability, you will also be able to pay for care or adaptations to your home.
You will also be able to ensure that family life can continue as usual. This could mean you can continue to pay for your children’s activities or provide financial support for older children.
How much does income protection insurance cost?
The cost of your monthly premiums depends on several different factors. Some are individual to you and others relate to the terms of the policy.
Age
The older you are, the more risk you place on the policy. This means premiums will be higher as you get older.
Health
Your insurer will assess the risk of you making a claim before they offer you a quote. This process includes asking for details of your medical history and any hereditary diseases that affect other family members. This may mean they don’t want to offer you insurance, or they may apply exclusions that mean you can’t make a claim if you’re absent from work due to a pre-existing medical condition.
If you are in good health, your premiums will be lower.
Your occupation
If you work in a high-risk occupation, your premiums will be higher. What is classified as a hazardous occupation may vary by insurer. It would be a good idea to get a comparative quote to compare income protection insurance prices.
Lifestyle
Your lifestyle can affect your overall health and the likelihood that you will be unable to work due to injury. Insurers will consider health factors, including whether you are a smoker. Participating in high-risk sports, such as rock climbing or deep diving, will also increase your premiums.
Waiting period
The waiting period is also known as the deferred period, the time you are willing to wait between the start of your absence from work and the time you want your policy to start paying. For example, you may receive full sick pay from your employer for several months. Choosing a grace period to suit this means your payments will start when your income drops. The longer the waiting time, the lower your premiums will be.
Definition of incapacity
Believe it or not, there are different definitions of what disability means.
Own occupation
This type of cover pays if you are unable to do your usual work. It is the most comprehensive cover available.
Suitable occupation
There may be circumstances where you can’t do your job, but you could do something similar. For example, if you have a bad back, you may need to stop doing work that involves lifting weights. Cover for a suitable occupation wouldn’t be worth it to you if you could switch to an office job instead.
Activities of daily living
This is the most basic level of cover and is usually only recommended if you cannot get any other income protection. It pays if you are physically unable to do any work. Insurers look at your ability to perform basic tasks such as walking, lifting, climbing or bending, as well as any other disability, such as visual impairment. Your policy will pay out if you cannot complete three of the above tasks.
The level of cover you need
It stands to reason that the higher the income you have to pay with your policy, the higher the cost.
You can calculate your needs starting with your current monthly take-home pay, the amount of sick pay you would receive during your absence and whether there are any benefits you could claim. It’s also important to consider whether the insurance payout would affect the means-tested benefits you currently receive.
Consider how much you will need to cover your monthly expenses while you are away from work. Although you won’t have to pay work-related expenses such as travel expenses, you might have other expenses due to illness or simply because you spend more time at home.
Index linking
When you’re looking at the level of cover you’re likely to need, it’s also important to consider whether your payouts will keep pace with the cost of living. While this may not be relevant if you’re only away from work for a short time, an extended absence could mean you’re struggling to pay your bills because your monthly payment doesn’t have the same purchasing power.
If your policy is index-linked, your payments will increase with inflation; however, your premiums will also be higher.
Common exclusions
You’ll find exclusions with every insurance policy, and checking the fine print to know what’s covered before you buy is key. This is important if you have any pre-existing medical conditions, as these may be excluded from coverage.
Income protection insurance exclusions usually relate to medical conditions and the reason for your inability to work. UK-based insurers will also only cover UK residents, meaning you can’t get cover if you live and work abroad.
The most common exceptions are:
- Self-harm
- Abuse of alcohol or drugs
- Simple pregnancy and birth
- Failure to follow medical advice
- HIV or AIDS
- Injuries sustained in war
- Injuries resulting from participation in criminal activities.
Are there alternatives to income protection?
There are other types of income protection insurance, but they are different from long-term income protection insurance. All of this is different from life insurance, which only pays out a lump sum in the event of death.
Insurance in case of accident, illness and unemployment
Accident and Unemployment Cover (ASU) offers short-term income protection cover that pays up to 70% of your income for 12-24 months. It’s cheaper than a long-term policy and will also pay you if you become unemployed or laid off, which income protection insurance does not.
The main disadvantages are that it will only be suitable if you are away from work for a short time. Your insurance provider also won’t take any health information when you take out the policy, so your claim could be rejected due to exclusions you didn’t know about in advance.
ASU cover is also likely to be a waste of money if you are self-employed. Exclusions from unemployment protection include any actions that terminate your employment; if you’re your own boss, that choice will probably remain entirely up to you.
Critical illness insurance
Critical illness cover pays a lump sum if you are diagnosed with a serious illness. This can be ideal if you need to adapt your home or want a lump sum to invest in your family’s future. Some insurance providers also allow you to add your children to your critical illness cover at no extra cost. This may allow you to take time off work to care for them.
The main disadvantages of critical illness cover are that it will only cover the most severe illnesses and usually only pays out once. If you recover and later have the problem again, you will not be able to apply again.
