Income protection insurance will replace up to 70% of your income if you have an accident or fall ill for a long period of time and cannot get back to work. Whilst this product is not often bought in the UK, it does have many benefits as well as some disadvantages. Here is a guide to income protection, to help you decide if you need this sort of cover in your life. We will also look at instances when a policy will not pay out, and steps you can take to prevent buying a poor quality policy.
Guide to Income Protection Insurance
Income protection insurance will replace part of your income if you cannot work because of accident or sickness. But does it work?
What is Income Protection Insurance?
As explained above, income protection will pay you a monthly income if you have an accident or develop an illness that prevents you from carrying out your job. With one of these policies, you pay monthly premiums to your insurer, who then agrees to cover up to 70% of your income if you are unable to work.
There are two main types of policy you can choose from- short term and long term. Short term policies will only pay out for a maximum of 12 months, whilst long term policies have the potential to pay out until retirement age. Some policies even offer cover for redundancy as well.
Who is it useful for?
If you are employed, your employer will have to pay you statutory sick pay for a certain period of time. However, if you are self-employed, you will not receive any sick pay, and your business may grind to a halt as you recover. Income protection is useful in both instances- it can be designed to kick in after your sick pay stops, or it can be used as soon as you fall ill or become injured.
How do I decide if I need it?
Think about what would happen to you if you lost your income. Do you have savings or a partner's income to rely on? If yes, income protection may not be the right product for you. However, if you would have to rely on government ESA benefits, then you might not be able to maintain your current lifestyle and income protection might be worth considering to meet the cost of your mortgage, rent, council tax or simply everyday bills.
How much will it pay me?
You can choose how much your policy pays you, but there is usually a limit of around 70% of your income. This is to encourage people to go back to work when they can. The more of your salary you choose to cover the higher the premiums will be, so it is worth sitting down and calulating how much you need to spend on a monthly basis. Look at your essential outgoings like any debt, bills and other insurance costs, and choose to cover as much of that as you can.
Some plans can be tied into a particular debt such as a mortgage or a credit card repayment. However, these policies may be more expensive than a traditional income protection policy, and they have been missold in the past.
How long will I be paid for?
As mentioned above, you can typically choose a long term or a short term plan. Short term plans will usually offer cover for accident, sickness and unemployment, but will only pay out for 12 months. These types of plans usually have cheaper premiums, but do not offer as much protection as a longer term policy. Alternatively, you could get a policy that covers you for just accident and sickness, but has the potential to pay out until retirement age if you cannot get back to work.
What will it cover?
These types of plans will typically exclude pre-existing conditions from cover, so it is better to take out a policy sooner rather than later. Other conditions that are commonly excluded include self-inflicted injuries and drug and alcohol abuse- the exact list of conditions will be provided by your insurer. Watch out for the small print- you do not want to take out a policy that doesn't offer cover for conditions you are worried about.
Did you find this information helpful?
Where should I look for a policy?
It can be easy to buy a policy with limited cover that does not offer everything you need, and many banks have been criticised recently for misselling a policy to their customers to cover mortgage and credit cards debts. The most important thing to do is to consider your own situation first before considering a policy. How long will your insurer pay out sick pay for? How long could you exist on your savings? Is an income protection policy provided through a group scheme at work?
Once you have thought about your own needs, you can begin to research the market. Do not just choose the first policy you come across- there are many different insurers in the UK and all of them offer a wide range of plans. One way of finding the right income protection cover for you is to use a broker- they will be able to give you unbiased advice about the whole market and might even be able to get you a discount from a particular insurer. Alternatively, you could use a comparison website or even an Independent Financial Advisor.
Most importantly, make sure you are happy with the terms and conditions before going ahead. Don't let yourself get caught out and be without crucial cover when you need it most.