Income Protection – Have You Heard of It?

Income Protection…’s the one protection policy every working adult in the UK should at least consider, yet also the one that most of us don’t have.
We insure our cars, our homes and our phones but most of us don’t insure the very thing that pays for these essentials……our income. When “Which?” asked the public, just 9% said they have some form of Income Protection, compared with 41% who have life insurance and 16% who have private medical insurance (PMI). Yet each year, close to a million people in the UK find themselves unable to work due to a serious illness or injury (ABI 2015).
Ask yourself, if you were to suffer a long-term illness or injury, would you be able to survive on your savings, or on the sick pay you get from work? If not, you’ll need some other way to keep paying the bills.
This where income protection insurance comes in. It ensures you continue to receive a tax-free regular income – based on a maximum percentage (often 50-60%) of your earnings prior to making a claim – until you are well enough to return to work or to your nominated retirement age, whichever is the sooner.
Policies pay out only once a pre-agreed period has passed (called the “deferred period”) and this generally ranges from one to 12 months after the point at which you are unable to work. Usually, you can claim as many times as you need while the policy lasts, so if you become ill or injured again, you’re still covered.
With income protection insurance, everything
depends on getting the right policy for you – so it’s best to get advice.
For instance, you need to make sure you get a policy with the right definition of incapacity to work – the best plans offer comprehensive “Own Occupation” cover, which payout as long as you are unable (through illness or injury) to do the same job you were doing prior to the claim (even if you might be “well enough” to do a completely different role). Cheaper, less comprehensive policies are also available however, offering cover on a reduced “Suited Occupation” basis for instance; and even budget “Any Occupation” basis (where you would need to be too ill or injured to any job at all).
A professional adviser will also make sure you are not over or under-insured – taking into account your sick pay entitlements, savings, possible state benefits and any existing policies you might have, whilst ensuring monthly premiums are affordable.
There are many factors which can affect the price you pay for cover including your state of health, previous sickness record, smoker status, and the job you do. Price will also be affected by the retirement age you choose, the percentage of current income being protected and the length of the specified “deferred period”. Premiums can be guaranteed throughout the policy, linked to age or inflation, or reviewable so again, an adviser will ensure you are aware of these options.
Who might not need it?
Obviously, not everybody needs Income Protection insurance. Here are some instances where this might be the case:
• You could get by on your sick pay. Many employers have a group insurance policy that means they can pay your salary even if you’re off long-term
• You could take early retirement. If you’re near retirement age, perhaps you could afford to retire early. If you’re unable to return to work you might be entitled to take your pension early.
• You could survive on government benefits.
• You have enough savings to support yourself.
• Your partner or family would support you.
A qualified financial adviser would take all of these factors into account before making any recommendation.
And two final points to note…..
Income Protection is not the same as Critical Illness insurance, which pays out a one-off lump sum if you have a specific, defined serious illness. Whilst there are exceptions, Critical Illness cover is often linked to a life insurance policy and usually taken out to cover a large liability such as a mortgage.
Income protection is also certainly not the same as payment protection insurance (PPI). Where PPI covers a particular debt and any payouts go to your lender, income protection gives you a tax-free proportion of your income if you’re unable to work because of illness or injury. How you spend the money is up to you.
For professional advice on Income Protection, book a no-charge, no-obligation appointment with local, qualified financial adviser Spenser Lees today, on 0792 511 6086.Or you can email him at: [email protected]