Which type of income protection would I need?
The type of income protection you need is dependent on how long you need your policy to pay you an income.
Short-term income protection policies, also referred to as Accident, Sickness and Unemployment (ASU) products, usually pay out for a year or two. There is a vast range of ASU policies available, including payment Protection and Mortgage Payment Protection Insurance.
Payment protection insurance normally covers the cost of a particular debt, which stops you from defaulting. Mortgage payment protection covers your mortgage payment costs for a set time period.
With both these policies, your insurer pays you directly. Subsequently, you need to meet the payment or cover your debt. Most short term income protection policies do not have to cover a particular debt; you can use them to fund your lifestyle in case you lose your income.
Long term income protection normally provides you with a regular income should you be unable to work as a result of illness or disability, up to when you are well enough to return to work, or until the policy term ends. It does not cover you should you be made redundant.
Should you claim on an income protection policy, you have to wait a while prior to it paying out and you can normally choose the time period. This waiting period is referred to as the 'deferred period’; it can vary from a day to 104 weeks. Opting for a longer deferred period can enable you to lower the cost of premiums.
Long term income protection
When selecting long term income protection cover, ensure you are aware of precisely which type of plan you are purchasing. There are two policy types you can select from.
One policy type can specify 'own occupation', that is, the policy pays out should the policyholder be prevented from undertaking any part of his or her own job due to accident or illness.
On the other hand, dependant on your occupation you could qualify for a policy on a 'working tasks' basis. This means it is only going to pay out should you be unable to undertake specific day to day living tasks. Say as a builder you incur a back injury and are unable to perform in your own job, your policy is not likely to pay out given that you are still able to undertake the pre defined 'working tasks'. The best policies of course are those that pay out should you be unable to undertake your own job, however, the premiums for such policies are costly.
What level of income protection cover do I need?
Normally you are able to insure around 50% of your gross salary free of tax. You are not allowed to insure for more than your gross salary, as insurance does not permit you to profit from your situation.
Carefully consider the amount you need every month to live in order that you are not under-insured. Should you opt for a longer term income protection policy as opposed to shorter term payment protection linked to a particular debt, ensure that you account for your fundamental monthly outgoings like your mortgage, Council Tax, food and utility bills.
Check other income cover benefits you may qualify for
First and foremost find out whether or not you are eligible for other benefits should you be unable to work prior to opting for any kind of income protection cover. Legally all employers have to pay the majority of employees statutory sick pay for up to 28 weeks. Thereupon you are likely to have to depend on state benefits.
Certain employers do have group income protection insurance in place for employees. Therefore, first look at your sick pay arrangements in your contract of employment as you will need money when you are no longer receiving any income.
Of note is that certain income protection policies can decrease what they pay out should you receive state benefits or claim money from any other insurance policy. So, it always pays to read the small print with care.
Income protection policy premiums
Monthly income protection premiums are dependent on various factors. The younger you are, the less expensive the premiums are likely to be, given that older people are more likely to become ill.
Moreover, your job relates to the amount you pay. Premiums, say, for an office worker are lower that those for a miner, as office work is generally a more safe occupation compared to mining.
Furthermore, smoking increases your cost of cover, as smokers are more likely to become ill.
Premiums can also be more expensive for females, as statistically they have a higher likelihood of claiming for conditions like stress, depression, breast cancer and hysterectomies.
You may not be permitted to take out this kind of cover should you have pre-existing health problems or in an especially dangerous job, as insurers are highly likely to consider you high risk.
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