21 Apr 2020
Could you pay the bills if you were sick, injured or couldn’t work?
There is a growing unease about the economic fallout of coronavirus (COVID-19), with many businesses laying off contractors and putting staff on extended leave, as well as natural worries about contacting the disease.
What this crisis has shown is that being unable to work can quickly turn our world upside down. No one likes to think that something bad will happen to them, but if you can’t work due to a serious illness, how would you manage financially?
Could you survive on savings or sick pay from work? If not, you may need some other way to keep paying the bills – and income protection insurance is an option to consider.
You might think this may not happen to you, and of course we hope it doesn’t, but it’s important to recognise that no one is immune to the risk of illness and accidents. No one can guarantee that they will not be the victim of an unfortunate accident or be diagnosed with a serious illness.
This won’t stop the bills arriving or the mortgage payments from being deducted from your bank account, so forgoing income protection insurance could be costly mistake in the long run.
Income protection insurance is a long-term insurance policy that provides a monthly payment if you can’t work because you’re ill or injured, and typically pays out until you can start working again, or until you retire, die or the end of the policy term – whichever is sooner.
Here’s how it can keep your finances healthy while you recover:
If you are self-employed, then no work is also likely to mean no income. However, depending on what you do, you may have income coming in from earlier work, even if you are ill for several months.
Self-employed people can take out individual policies rather than business ones, but you need to ascertain on what basis the insurer will pay out.
A typical basis for payment is your pre-tax share of the gross profit, after deduction of trading expenses, in the 12 months immediately prior to the date of your incapacity.
Some policies operate an average over the last three years, as they understand that self-employed people often have a fluctuating income.
The cost of your cover will depend on your occupation, age, state of health and whether or not you smoke.
The most comprehensive definitions are ‘Own Occupation’ or ‘Suited Occupation’. ‘Own Occupation’ means you can make a claim if you are unable to perform your own job. However, being covered under ‘Any Occupation’ means that you have to be unable to perform any job, with equivalent earnings to the job you were doing before not taken into account.
You can also usually choose for your cover to remain the same (level cover) or increase in-line with inflation (inflation-linked cover):
When you take out cover, you usually have the choice of:
How long you have to wait after making a claim will depend on the waiting period. You can typically choose from between 1, 2, 3, 6, 12 or 24 months.
The longer the waiting period you choose, the lower the premium for your cover will be, but you’ll have to wait longer after you become unable to work before the payments from the policy are paid to you.
Premiums must be paid for the entire term of the plan, including the waiting period.
Depending on your circumstances, it is possible that the payments from the plan may affect any state benefits due to you. This will depend on your individual situation and what state benefits you are claiming or intending to claim. This market is subject to constant change in terms of the innovative new products that are being launched.
If you are unsure whether any state benefits you are receiving will be affected, you should seek professional financial advice.