We often get asked, should I protect my income?
When it comes to protecting your family and livelihood, you just can’t be too careful. It may come as a surprise to learn that only 35% of UK adults hold a life, critical illness or income protection product.
This equates to 15 million people, which may seem like a lot (source – page 35) but comparing it to the 17.6 million who have gadget, phone or warranty products, it could be argued that UK adults are seemingly more likely to protect their gadgets than their income!
Even with only 35% of the UK adult population holding life, critical illness or income protection products, insurers still pay out £17.1million every day for claims, highlighting just how important income protection insurance can be. (source) Nobody likes to think that something bad might happen, and there’s certainly nothing wrong with that positivity day-to-day- but it’s important to be prepared in case something goes wrong.
Income protection is one of the most important things in financial planning but often overlooked by many. There are various types of income protection which we’ll explore, but first it is useful to know what the statuary sick entitlement is to understand the importance of protecting your income.
Should you find yourself in a position where you can’t work, it’s likely you’d get some form of sick pay from your employer or through statutory sick pay (SSP), but in most cases SSP equates to around £99.35 a week for up to 28 weeks (UK Gov website), which many find doesn’t match the income they’re used to, making it a struggle to make ends meet
Some employers will continue your pay during periods of sickness, this is at the employer’s discretion and isn’t guaranteed, it can vary from one week to 2 years. It may be useful to know that you can tailor some income protection policies around employer sick pay.
Income Protection
What are the different types of income protection insurance?
There are several different income protection products designed to protect your income or cover your outgoings.
Is income protection like PPI?
Income protection is not the same as PPI (payment protection insurance). PPI is a type of insurance sold alongside credit agreements like loans, car finance or credit cards to make sure repayments are made if the borrower becomes unable to afford them, perhaps due to unemployment, sickness or injury. The whole scandal around PPI was that it was just added to people’s loans whether they would have been eligible to make a claim or not.
Income insurance is designed to protect your income and ability to pay your credit commitments and your life costs, such as food, bills, utilities and childcare. A valid claim gives you a monthly, tax-free percentage of your income(https://www.gov.uk/income-tax)- allowing you to distribute it accordingly.
What does it cover?
All types of income protection insurance allow you to protect your ability to meet financial commitments in the event you’re unable to work and earn your usual income due to illness or accidental injury. Financial commitments income protection insurance can cover include:
- Salary
- Mortgage or rent payments
- Loan payments
- Credit card repayments
- Daily living costs
- Other financial commitments
Some insurers allow you to protect up to 70% of your gross salary. It’s important to remember that income protection doesn’t cover death, to be insured for this you’ll need to consider life insurance.
What doesn’t it cover?
Income Protection doesn’t cover everything, things that an insurance policy doesn’t cover are often termed ‘exclusions’ and it’s important to check your insurance policy to be sure your concerns don’t fall under an exclusion before purchasing it. Exclusions could include but are not limited to:
- Pre-existing conditions
- Some policy covers mental health, some policy excludes it. If this is something that is relevant to you it’s worth double checking whether the insurance you’ve chosen covers this
- Normal pregnancy
- Specific policy exclusions
- Voluntary redundancy
- Voluntary resignation
- It’s essential to thoroughly check the policy of income protection to be sure that it covers the types of illness, or injury situation you might be concerned about.
- If it is known that you may be at threat of redundancy prior to taking out the cover
Also, there may be an initial Exclusion Period or Waiting Period attached, see below.
How soon am I covered by income protection insurance after taking it out?
Your cover starts as soon as your application is accepted, and your policy begins. Don’t forget though that your policy may include a ‘waiting period’ meaning you won’t be able to make a claim before a specified time has passed. This is normally 3 to 6 months where no claim can be made. This is to protect the insurer against large scale claims if many applicants may know that that their company could be laying people off or an applicant feels that they may have a serious illness before taking the cover. Once you have paid premiums beyond the initial “exclusion period” then you will be covered.
To find out how to get cover as soon as possible, speak to one of our specialist advisors.
You may also choose a “deferred period”, this would mean if you made a valid claim, you’d wait a period before payments would begin. You may think that you want cover immediately, however the sooner the payments are made the higher the premium, so applicants may choose a deferred period to bring down the monthly premium. You can usually select deferred periods from 4 weeks to 12 months- the longer the deferred period the lower the premium. You can sometimes opt for “back to day one” cover. This would mean that if you chose a 30-day deferred period with back to day one cover, on the 31st day, a claim payment would be made covering the period going back to day one of your claim.
Can I take out long-term income protection?
Simply put, yes- You can select an end date of the cover up to your retirement age and cover up to a maximum of 70% normal take home pay.
For this type of cover you would go through a full underwriting process, but once cover is given by the insurer it won’t be withdrawn or changed (even due to new health conditions)- providing you keep up your premium payments. It is worth noting applications may be declined if you have a serious medical condition or have a high-risk occupation, but this can be discussed with an adviser before you apply. You will need to think about some of the points listed below, all of which will have an influence on premium prices. See more about how much income insurance will cost?
- Employment type– many insurers will put you into a risk category according to your type of employment. For example, a low risk profession, like an office administrator might have lower premiums than a high-risk profession, like a construction worker. This is because a person in a high-risk profession is more likely to make a claim on their income protection than someone in a low risk profession.
- Age – you can apply from 18 years year old, most insurers let you apply up to 60 but this is increasing with some insurers as people are working for longer.
- Family medical history – insurers will want to know what your family medical history is to get a better idea of what kind of insurance they can offer.
- General health
- Whether you’re a smoker
- Amount you want to cover– this will affect your premiums so insurers will want to know how much you want to protect in the event of your inability to work.
- Deferral period– the amount of time you must be off work before receiving payments. A longer waiting period is likely to have lower premiums as opposed to a shorter waiting period, but it’s worth checking to see how much cover you might want and how soon before choosing an income protection insurance plan.
- Benefit payment period, you can set the benefit payment period per claim to be 1, 2 or 5 years, or full term- which means in the event of continuous claim the insurer would pay out until the policy end date.
Who might want a type of income protection?
Anyone who would struggle to live without their regular income earned from working should consider income protection. It’s not something that many people consider until the protection is needed, but being proactive and taking steps to prepare for the possibility of injury or illness can help keep you and your family financially safe should need arise.
speak to one of our specialist advisors at Prestige Mortgages to find out if income insurance is right for you.
I work part time. Can I still take out Income Protection Insurance?
You can take out the various forms of income protection described above with part-time work. Just like income protection with full-time employment, you can protect a percentage of your income when you’re in part-time employment with an income protection insurance policy, covering you in the event of sickness or injury.
If you’re in part-time employment and want to take out income protection insurance, get in touch with one of our specialist advisors
How much income protection cover can I get?
To find out how much cover you might want, you can calculate your essential monthly outgoings. This could be things like:
- Mortgage or rent payments
- Household bills. Think about your food shops, internet bills, telephone packages etc
- Utilities. Your gas, electric and water bills will still need to be paid if you’re unable to work.
- Childcare costs
- Loan repayments
- Credit card payments
- Essential running costs
When you add up your living costs to figure out what income protection you could use, bear in mind some travel costs, work clothes and equipment, work lunches and other associated costs might be decreased or stop if you’re unable to work.
Once you have your total, check and see how much statutory sick pay you’re entitled to or how much your employer will pay while you’re off work, then subtract this from your overall sum. This should give you an indication of how much cover you could use to keep paying your living costs in the event of being unable to work.
It’s important to remember that statutory sick pay only last 28 weeks, whereas some employer sick pay schemes can last up to 12 months so bear this in mind when choosing your cover. Your adviser will take this into account and discuss the best option.
Its also important to remember that the maximum cover you can obtain is 70% of your normal gross salary, and many insurers cap the total level of cover, which could be less than 70% depending on your salary.
How long does income protection pay out for?
This depends on the type of product you have and, with some policies, how long you choose when getting your quotation. If you make a valid claim on your income protection insurance, you could get payments until you’re well enough to return to work, unless you retire before that.
You can get long-term protection and short-term income protection insurance. Some plans will pay out until you retire, some will only last a few years, so it’s important to decide how much cover you might need and how long you might need it for.
How many times can I claim?
With a traditional long-term income protection insurance policy, you can claim as many times as you need to while the policy is active.
How much does income protection cost?
The cost of your income protection will depend on the product you choose and a variety of factors -insurers will use many elements of your personal circumstances to calculate the premiums in your quotation.
- Employment type– many insurers will put you into a risk category according to your type of employment. For example, a low risk profession, like an office administrator might have lower premiums than a high-risk profession, like a construction worker. This is because a person in a high-risk profession is more likely to make a claim on their income protection than someone in a low risk profession.
- Age – you can apply from 18 years year old, most insurers let you apply up to 60 but this is increasing with some insurers as people are working for longer.
- Family medical history – insurers will want to know what your family medical history is to get a better idea of what kind of insurance they can offer.
- General health
- Whether you’re a smoker
- Amount you want to cover– this will affect your premiums so insurers will want to know how much you want to protect in the event of your inability to work.
- Deferral period– the amount of time you must be off work before receiving payments. A longer waiting period is likely to have lower premiums as opposed to a shorter waiting period, but it’s worth checking to see how much cover you’ll need and how soon before choosing an income protection insurance plan.
- Benefit payment period, with PHI policies you can set the benefit payment period per claim to be 1, 2 or 5 years or full term, which means in the event of continuous claim the insurer would pay out until the policy end date.
Get in touch with one of our specialist advisors to get a (free) quote on your income protection insurance.
Self-employed income protection
If you’re self-employed, you don’t have access to statutory sick pay as you don’t have an employer and, without income protection insurance, would have to apply for ESA. Because of how the new Universal Credit system works, it’s likely you’d have to apply for that and claim ESA within Universal Credit.
If you’re self-employed, it’s advised that you consider income protection insurance to protect some of your income in the event of sickness or injury. Income insurance for self-employed workers usually offers cover for around 50%-70% of your income, just like regular income protection insurance.
Are you self-employed and want to protect your income? Get in touch with one of our specialist advisors to take the first step towards protecting your livelihood.
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