Guide to Income Protection Insurance

“ “If you couldn’t work due to a serious illness, how would you manage? Could you survive on savings, or on your sick pay from work? If not, you’ll need some other way to keep paying the bills – and you might want to consider income protection insurance.” – Money Advice Service ”

If you are unable to work due to an injury, sickness or medical condition (long term) Income Protection will pay you a regular sum each month. It will continue to pay out until you return to work or you retire. It is not life insurance, so the policy will end and not make any payment if you die. You may know (long term) Income Protection Insurance by its previous name “Permanent Health Insurance” (PHI).

Official figures (2014) show that around 300,000 people a year fall out of work and into the welfare system because of health-related issues. More than half are over 50 with a third between the age of 55 and 64 (poverty.org.uk 2011). Many suffer financial hardship as a result.

Long term Income Protection Insurance could be right for you if:

  • You are aware State Benefit payments would never pay enough to meet even your regular outgoings
  • You do not have enough savings to maintain you or your family’s lifestyle for an extended period during which you were unable to work for health reasons
  • You want the reassurance of knowing that should a serious accident or illness prevent you from ever working again, you will receive payments until the day of your retirement.

Buying (long term) Income Protection Insurance

“ Income Protection is the one protection policy every working adult should consider. Which? Money 2012

Who is it for? Long term income protection cover is designed to ensure you will continue to receive an income until you retire should you be unable to work due to illness or disability.

When does it pay out? If you’re unable to work due to accident or a medical condition, it starts paying out after a set time, usually between six months and a year after you become ill. Most people select their payments to start when their Statutory Sick Pay or employer’s sickness benefits end.

How much do you get? Benefit payments are commonly based on a percentage of your earnings. This is typically between 50 and 70 percent of your gross income (earnings before tax and National Insurance). Claim payments are tax free, so the amount you receive should enable you to largely maintain the lifestyle your family enjoyed when you were working.

How is it paid? Income protection policies pay out after an agreed period of time. This usually ranges from at least one to twelve months after you put in your claim. This is known as the ‘deferral’ period. Your premiums are lower the longer you wait before receiving benefits. Most people are offered a deferral period of 13 or 26 weeks to coincide with the point at which their employers sick pay scheme runs out. Regular benefit payments are mode until you return to work or you retire.

What should I look out for? Types and level of long term income protection insurance see below:

The three principal types of long term income protection insurance, they differ with regard to how you pay the premium:

  • Guaranteed – this means your premiums will not go up unless you increase your cover.
  • Reviewable’ – your premiums will be considered about every 5 years and may well go up, however they usually offer lower premiums at the outset.
  • Age related – premiums start lower but there is a schedule showing you how premiums go up as you get older.

It is particularly important you understand what you are buying as there are four different levels of long term income protection cover to choose from.

  1. Own Occupation; this pays out is out if you cannot continue with your own job because of an accident or medical condition. This means it would pay out even if you were still fit enough to do less demanding work. If you have an occupation that demands a high level of physical fitness if is likely that you won’t find a provider willing to cover you on an own occupation basis
  2. Suited Occupation; this pays is you cannot do a job you are suited for based on your skills, training, qualifications and experience. The insurance company make this decision.  However it could mean you have to take a much lower paid job and not continue to receive payments under your policy.
  3. Any Occupation; this means the policy will only pay your claim if you are incapable of doing any job at all. Therefore, even if a severe accident meant you could no longer walk, the policy would not pay out because you would still be able to undertake office based work.
  4. Working Tasks/Activities of Daily Living; you may only be offered ‘working tasks’ cover if you are a self employed builder for example. This will only pay out if you cannot do certain tasks, theses can include the ability to use a pen or keyboard, walk, talk, see or hear. Similarly the ‘activities for daily living’ cover may only pay out if you cannot dress yourself or hold a pencil.

If you have a job that demands physical fitness, you’ll find policies which pay out if you can’t do your own job are more expensive.

The importance of independent advice

 

There are numerous variations of long term Income Protection insurance that providers have designed to meet the needs of customers. Consequently sources of consumer advice, such as the Money Advice Service, urge people to go to a Financial Adviser to ensure they consider a product best suited to their needs.

Long term Income Protection Insurance is a long term commitment. You may call upon it numerous times during your working life, it is therefore imperative the best product is chosen to meet your individual circumstances and budget.

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