Continuing from last week’s blog on Critical Illness Cover, Income Protection is another of the core life insurance policies which together provide “fully comprehensive” cover should you ever need it. Life cover, critical illness cover and income protection each serve a distinct purpose and this blog will explore income protection, what it is, what it covers and how it can be tailored to suit your own unique financial needs.
Income Protection is a life insurance policy designed, as its name suggests, to replace your income if you are signed off work due to accident, sickness or disability. Most life insurance providers will allow you to cover yourself for around 60% of your annual income and this would be paid monthly as a tax-free sum if you were to need it. Unlike critical illness cover, income protection doesn’t have a specified list of conditions which it covers – the policy will pay out for any condition if you are signed off work by your doctor. Statutory Sick Pay (SSP) currently stands at £96.35/week paid by your employer for a maximum of 28 weeks – would this be enough for you and any family you have?
While some employers will provide great sick pay packages, none of these last forever if you’re unable to work long-term. An income protection policy is established with a “deferred period” which represents the time between being signed off work and when the policy begins paying out to you. For example, if you receive 3 months full sick pay from your employer, the deferred period would be set for 3 months. Deferred periods are typically available from 1 month right the way up to 12 months so they can be adjusted to suit your situation. Naturally, a longer deferred period will be cheaper as there is less chance of the insurer having to pay out as you are more likely to have returned to work.
Short Payment Periods on income protection are a way of reducing the cost of the cover by decreasing the duration of any pay out. Whereas a normal policy will pay until the end of the policy term, a short payment period means the policy will only pay out for a set period from the onset of a claim. Common options are 1, 2 or 5-year short payment periods. It is important to note that after the short payment period finishes, the policy will no longer pay out regardless of whether you are still off work.
Own occupation income protection means the policy will pay out if you’re unable to do your current job. There are other forms of income protection which may require you to retrain and take a different job in a whole new industry if you are able to do so (eg: moving from manual work to office work if you’ve been physically disabled). As there is less chance of the insurer having to pay out, these options are cheaper.
An income protection policy is usually taken until your planned retirement age as after this point, there is no employed or self-employed income to protect. Most insurance providers will cap the maximum age at 70 and sometimes younger for especially active occupations.
The medical underwriting process part of a life insurance application will determine the terms offered by the insurance provider. They have the right to increase the premium, place any exclusion on a policy and postpone or decline the application based on your medical history. For those with pre-existing health conditions, if the insurer deems this makes you more susceptible to suffering a repeat of the same condition, placing an exclusion on the policy is common. This means you would not be covered if you were to be signed off work due to the excluded condition.
How would you maintain your quality of life if you lost your income? Do you have family or a partner who is dependent on your income? Could you pay your bills on £96.35/week? Income protection allows you to minimise the financial impact if anything happens to your health causing you to be unable to work for a long period of time. For more information on income protection and any other life insurance policy, feel free to get in touch!