What is income protection insurance?
Formerly known as permanent health insurance (PHI), long-term income protection (IP) is an insurance policy that pays out if you are unable to work due to injury or illness. You may have seen the Paul Whitehouse-fronted Aviva advert, or Unum’s Back-up Plan adverts – both promoting income protection. IP usually pays out until retirement, death or your return to work, although short-term IP policies are now available at a lower cost. IP doesn’t usually pay out if you are made redundant, but will often provide ‘back to work’ help if you are off sick. Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Payments are tax-free. IP policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim.
Different types of income protection policy
Long-term income protection: This type of IP policy pays out until a fixed age, death or your return to work. It’s underwritten at the point of applying for the policy, rather than when you put in a claim. This means you will know exactly what you’re covered for from day one, as well as any pre-existing conditions you are not insured for. Short-term income protection policies are fully underwritten when you take out the cover. However, rather than pay out until death or retirement, short term income protection, known as STIP, has a fixed maximum payout period of between one and five years. Accident, sickness and unemployment (ASU) cover providers may screen potential customers, but do not conduct full medical underwriting at the outset. Cover tends to be cheaper than IP, but you have less certainty that you will be covered when you come to put in a claim.
Why you can’t always rely on State benefits
Many people believe they may be entitled to receive some financial help from their employer or through the state benefit system should something happen to them. However, in reality you may not even receive enough to maintain your current lifestyle. The state employment and support allowance may only pay a fraction of what you need and your individual circumstances will affect how much you get. Three out of five people could not survive financially if unable to work due to injury or illness. 98% of people say they could not survive on government support alone
Why do I need IP?
According to research by Unum and Personnel Today, just 12% of employers support their staff for more than a year if they are off sick from work. Given the low level of state benefits available, everyone of working age should consider IP, but when we asked the public, just 9% said they have some form of IP, compared with 41% who have life insurance and 16% who have private medical insurance (PMI). One industry survey showed less than a quarter of people deemed protecting their income to be essential, compared with 74% who said broadband internet access was imperative.
Is income protection the same as PPI?
Let’s be clear – income protection is not the same as the widely mis-sold payment protection insurance (PPI). Where PPI covers a particular debt and any payouts go to your lender, income protection hands you a tax-free percentage of your income if you are unable to work due to illness or injury. How you spend that income is up to you.
Guaranteed, renewable and age-related IP
Guaranteed: The amount you pay stays the same throughout the policy term. The premium will only go up if you increase the cover. Most cost slightly more to start with, but we believe they are best if you can afford the extra cost. For a forty year-old, non smoking administrative clerk covering a payout of £250 per week, a guaranteed IP premium will typically be between £25 and £40 a month.
These policies tend to start a little cheaper than guaranteed policies, but the premiums are reviewed after a set period – typically every five years – at which point the provider can increase the amount. Some insurers reserve the right to increase your premiums with as little as 30 days’ notice on a reviewable policy.
These policies are good for people in higher-risk jobs or for smokers because these factors are not always taken into account when deciding the premium. Often starting off cheaper than guaranteed and reviewable policies, you need to watch out for the premium rising each year as you get older. However, unlike reviewable policies, the age-related price increases are calculated and agreed with you when you take out the policy – so at least there should be no surprises later on and you will not be caught out by any unexpected price hikes.
Do you really need Income Protection?
There are no financial certainties these days, and in the current economic climate it’s now more important than ever to protect yourself if you want peace of mind and security. So having reliable Income Protection Cover in place means you could receive an amount of money that replaces most of your net income to help pay your mortgage, bills and general living expenses.
You are the most important thing you have?
Most people seem to insure everything but their lifestyle. From mobile phones to fridges, to cars and even pets, everything is protected except themselves, their lifestyle and what pays for it, namely their income.
If you don’t insure your income, how can you pay for everything else? And unfortunately, thinking that ‘it won’t happen to me’ doesn’t measure up to the facts. You are far more likely to experience a chronic illness than die before your retirement age. So imagine if you were ill: how would you live and maintain your current lifestyle?
Please note: the above points are based on our understanding of the current state benefit system. For specific information about your entitlement to claim state benefit, you should contact your local Department for Work & Pensions office.