Income Protection Insurance
Get a monthly payout if you can’t work - income protection insurance protects everyone who relies on their income to live. If you’re suddenly unable to earn a salary, you know that you will still have money coming in every month.
Short Introduction of Income Protection Insurance
This article looks at what income protection insurance offers you and your loved ones and compares income protection insurance against the alternatives you have at your disposal.
What if...? Income Protection Insurance
Our minds can go to the worst-case scenario during tough economic times. For example, do you ever worry about what would happen to you or your family if you lost your job or became unable to work?
Especially in this uncertain times with covid 19.
What Is Income Protection Insurance?
Income protection insurance refers to a form of coverage that pays the policyholder a regular income if they become unable to work due to illness or injury. Your cover lasts until you return to paid work or retire. Some refer to these policies as permanent health insurance. It is slightly more comprehensive than that as you can also acquire protection against redundancy (provided you were let go for reasons out of your control, like downsizing). The policy covers a portion of your monthly salary to cover debt repayments, mortgage payments and other bills while you are out of work.
How Does Income Protection Insurance Work?
Income protection insurance pays a regular sum to you to cover your lost earnings and living expenses if you become unable to work due to ill health or an accident (or lose your job through no fault of your own). Most policies make regular payments of between 50-65% of your income and continue paying that amount until you return to work or retire permanently. You can claim as many times as you need from the insurance policy while the policy lasts, but terms and conditions apply.
Most of these income-related insurance policies have a deferred period or pre-agreed waiting period stipulated within the policy documents, usually 4 - 26 weeks a year. The longer the waiting periods are, the cheaper the monthly premiums will be.
While your insurance policy will cover you should you fall ill with specified acute diseases, it's not the same as critical illness insurance, which pays a once-off lump sum if you fall sick. The policy will continue making smaller payouts per your agreement until you can work again.
Note that your income protection claims won't replace your entire salary. You can expect to receive about half to two-thirds of your earnings before tax. You can, however, claim state benefits and statutory sick pay from your employer if you are unable to work due to illness or injury. The income you get from the policy is tax-free.
Different Types Of Income Protection
Most insurers offer short term income protection that pays out for a set period (usually 12- 24 months) until you resume work. Still, it is possible to obtain long-term insurance for a prolonged period. The more extended policies will usually not cover redundancies.
When you acquire this insurance policy, it's essential to look carefully at your insurer's definition of incapacity or inability to work.
Own occupation policies payout if the policyholder cannot perform any aspect of their own job due to an accident or illness. This means you can claim if you can't do the job you had during your claim.
Suited task policies payout if you cannot perform any aspect of your job or any alternative job that you might be able to do based on your education and training. In other words, you'll only receive a payout if you can't work in any role you are suitable for (based on your skills). The benefit of this policy is that it still offers a measure of security and protection but is much cheaper than own occupation income protection policies.
Any occupation policies will only payout if you are medically unfit to perform any work whatsoever. The policy's odds paying out are lower than the others, but so are the premiums.
Income Protection Insurance - Short Overview
You cannot claim from your income protection policy if you accept voluntary redundancy, resign from your job, or are asked to leave due to misconduct. You are also not protected by your insurance policy if your employer doesn't retain you after a probation period. You can, however, claim state benefits.
Your personal and family medical history may affect your premiums, as do pre-existing conditions, because you may be seen as a higher risk to different insurers. You might pay more for your premiums or have an exclusion applied to your policy.
It's not possible to take out joint cover with a partner or spouse because each policy has to be written based on your personal, individual circumstances. If you need income protection insurance that covers your monthly outgoings, you should calculate the cover amount you'll need equivalent to each partner's contribution. Remember that your monthly benefit amount will not be more than 65% of your average monthly income, so it's always a good idea to keep enough savings in the bank to cover loan repayments or essential outgoings.
Your income protection policy is voided when you die. If you have dependents that need financial support or otherwise rely on your income, you should consider taking out a life insurance policy
Income protection has no cash-in value and can't be cashed out. If you cancel your policy or stop making payments, you won't receive a benefit. However, most insurers will offer you a refund if you cancel within 30 days of obtaining the policy.
How Much Income Protection Cover Do I Need?
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While income protection cover offers some financial support, it's not a substitute for your paycheck. To work out the level of cover you need, work out your monthly pay (after deductions). Then add the amount you'd get in-state benefits and deduct what you spent on work-related expenses (like your daily commute). You want to have enough money coming in to cover outstanding loans, but you also need to weigh up the cost of the premiums against the risks you are facing by not taking out a policy. Depending on your marital status or the number of dependents you have, you may want less or more cover than an income protection policy offers. Speak to your financial adviser about your options.
Do I Really Need Income Protection Insurance?
- How long can you and your loved ones meet your financial obligations without your current income?
- How many people are dependent on your income?
- Are you comfortable with taking out a loan if you need to?
- Do you have access to sick pay, and if so, will you be able to meet your financial obligations with that amount alone?
Lastly, consider the difference a successful claim would make if the worst happened.
Does My Income Protection Increase When My Salary Increases?
Whether or not your income protection policy increases when your salary does depends on your insurer. You'll be able to choose between the index-linked increasing cover that goes up automatically every year in line with inflation (along with your premiums) or fixed increase cover that increases by a fixed percentage annually. Others may offer guaranteed premiums that stay the same for the entire duration of your policy.
Can Self-Employed People Get Income Protection Insurance?
Self-employed people can (and should) buy income protection insurance, especially since they won't receive benefits like statutory sick pay. If you are self-employed, your payout will be based on the average monthly income you make and provide a monthly payment until you can resume operations or until the term ends. You won't be able to claim if you've had a few months without your regular income due to shifting market conditions or defaulting clients.
Is Income Protection Insurance the Same as Unemployment Insurance and Payment Protection Insurance?
You can distinguish between income protection insurance, payment protection, and unemployment insurance, although they often go hand in hand.
Income protection usually only covers illness and injury and follows the own occupation policy definitions. Payment protection insurance is associated with suited task incapacity definitions. Unemployment cover may or may not form part of your income protection insurance policy and protects you against the risk of redundancy. It's usually sold as an "add-on" to traditional income protection insurance policies.
Some Alternatives To Income Protection Policies
Savings are meant to cushion you when unexpected expenses crop up, but they aren't a good substitute for a steady income. If you are disciplined with money, you can rely on your savings if you cannot work for an extended period. However, even a substantial nest egg will only last so long, and you may be tempted to dip into your kitty ever so often.
Before taking out insurance, it's a good idea to examine your employment contract. You may have excellent sick pay benefits (primarily if you work in the public sector) to provide you with your total salary for several months.
Critical illness insurance pays a lump sum if you are diagnosed with a particular illness (in a certain stage of progression). Bear in mind that not all diseases are covered (and that not all policies cover injuries or disability). Pre-existing medical conditions may also affect your ability to acquire this insurance.
Mortgage payment insurance or mortgage payment protection insurance will cover the cost of your mortgage payments every month if you lose your job or become too ill to work. For many of us, mortgage payments are our most significant monthly expense, so this can put your mind at ease if you are worried about covering your payments. However, most policies will only payout for a year or two at most.
Very few of us can afford to live without our primary income for an extended period, but most of us can afford income protection insurance. Hopefully, the worse case scenarios we all dread won't happen at all, but if they do, income protection insurance can provide a significant portion of your salary to you every month to cover your financial obligations when you need it. Speak to your financial adviser, insurer or broker about your options.
Income Protection Insurance FAQs
Short-term income protection will cover you for accidents, sickness and unemployment if you are unable to work for a specific period of time (e.g. six months to one year). Long-term income protection will cover you against accidents or illness, but not unemployment.
If you are an employer that provides income protection insurance, it is completely tax-deductible. If you are an employee, your payout is taxed via PAYE. If you make a claim, your payouts are tax-free because they would have been covered by pay-as-you-earn taxation.
Income protection usually refers to long-term income protection insurance that pays a monthly percentage of your regular income to you until you return to work or retire. ASU (Accident, Sickness and Unemployment) cover is typically a form of short-term income protection insurance that will pay a percentage of your income for a limited period of time.
A deferred period refers to the period of time between the first day that you are unable to work and the date of your first payout. The longer your deferred period is (4, 8, 13 or 26 weeks), the cheaper your premiums will be.