What is Income protection?

Income protection helps to protect your lifestyle and/or your financial commitments by insuring your income against the financial impact of long term illness or injury. A key consideration should be how long you and your family could survive financially if you or another key family member was injured or was ill. Income protection helps putting you into a similar place to where you were financially before you were unable to work. It pays out a regular monthly tax free income.

Income protection does not enable you to make a profit from your illness or injury and will out roughly between 50% – 75% of your earnings before tax.

Each individual income protection requirement will be different and it essential to get advice. For example there are policies that have long deferment periods which can be tailored to start paying out after your sick pay finishes at work and then will payout until your pension income starts. Every ones circumstances are different and an advice is of paramount importance to ensure that you are buying exactly what is needed for your requirements.

The Need for Income Protection

A large proportion of the population have bills to pay these could be for their mortgage, credit cards, phone, gas, electric, council tax and others. It seems especially at the moment that most people are working longer hours and are working harder to pay the bills. If you are unable to work then the bills do not stop arriving.

Most people without a regular income will struggle to meet their commitments. If you are ill for a short while then you may be able to cover your expenses with savings and you may get sick pay although this is rarely as much as you would normally get. If you are self employed then if you cant work then you get no income. Realistically few people could pay all of their bills if they were off work for 6- 10months.

If you are seriously injured or seriously ill you may not be able to work again.

It is amazing how many people purchase life insurance probably because death is inevitable but between when you work and retire you are more likely to be off work for 6 months than die.

There is a need for income protection for many people and if it is done correctly it can help secure your and your families future wellbeing.

Main types of Income Protection

There are many different types of income protection policy a brief definition would be that Income Protection Insurance applies to insurance products that pay an income if you are unable to work due to sickness or injury.

A type of Income protection by this definition is Accident, Sickness and Unemployment Insurance or Mortgage Payment Protection insurance. This is not covered in this section but can be found here at www.quotewire.co.uk/MortgagePaymentProtection this kind of insurance offers a short term cover of one to two years and is usually set up to cover payments on mortgages, loans or credit card debt. We will continue to talk about income protection that covers your income due to long term illness or injury.

We are not going to confuse you here with describing the different income protection policies as if you request advice then your advisor would be best to describe and guide you through the various policies.

What is the best income protection policy for me?

Be wary of purchasing an income protection policy from a bank as they are usually tied to one provider.

Do not confuse income protection with payment protection policies that are designed to pay mortgage, loan or credit card payments and only payout for 1-2 years. Income protection has longer terms and the facility to offer more protection.

Don’t just look at the price of the policy as a cheap policy may not have the cover that you require there is often a reason why the policy is cheaper and you may not be purchasing the cover you require. Make sure that you get advice on what the policy covers and its limitations.

Occupation class

You should always check your occupation class. If you are unable to work the insurer needs to verify this. Some policies will cover you for own occupation and some will cover you for any occupation. It is essential to know which cover you are taking out as you may not be fit to work within your role however you may be fit in an insurers eyes to work in another occupation.

There are three main categories of being unable to work

Usual Occupation – You are unable to perform your own job
Suited Occupation -  You are unable to do your own job or any other that you are suitably  qualified to do.
Any Occupation – You are unable to do any kind of work.
Own or Usual Occupation policies are usually preferred to any occupation policies and are more expensive.
If you change your job then you should make your insurer aware of this.

What deferment period should I have

The deferment period of a policy will be the amount of time that you have to be off work before the income is received from the insurer. The longer the deferment period then the cheaper the price. It will depend on your individual circumstances and how long you feel that you can pay the bills for after being off work to what your deferment period will be. It may be that you receive sick pay for 6 months and would require the insurance to start paying the income after 6 months or you may be self employed with little savings and would require the income to start after a 1 month deferment period.

How much cover should I have?

Don’t purchase too much cover as the cover is tax free so it will not have to cover your gross income. The insurers differ in how much they will cover you for but typically it is between 50% – 75% of the gross salary. You may only feel the need to cover you mortgage or loan costs. If the insurer discovers that your income ha increased since you were off work then they will adjust the benefits accordingly.
Do make sure that you have enough cover and work into your work earnings all aspects of your income including bonuses and overtime for example.
How long should I have cover for?
You may require the cover over a fixed term of 10 or 5 years to cover a liability or until the children have reached a certain age. Some budget plans to offer 12 or 24 month cover. Certain policies will allow you to renew your cover until you retire.  It is also a matter of seeing what cover is affordable to you and to compare different terms and cost. Please get advice on these issues.