10 Sep 2014

Income Protection: Why?

Income Protection: Why?

Kenny Mantle, Financial Advisor, explains what Income Protection is and why it is beneficial to have it. 

Kenny Mantle, Financial Advisor, explains what Income Protection is and why it is beneficial to have it. 

Only 12% of employers support their staff for more than a year if they’re off sick from work, according to research by Unum and Personnel Today.*

Many of us have insurance policies such as Critical Illness Cover; Private Health Insurance; and Payment Protection Insurance. These products do have a role to play; however, the one protection policy that every working adult in the UK should consider is the very one most of us do not have - Income Protection. 

In fact, a recent industry survey showed less than a quarter deemed protecting their income essential, compared with 74% who said the same of broadband access. I don't agree.

What is Income Protection?

Income Protection pays out if you are unable to work due to sickness or accident. Formerly known as permanent health insurance, long-term income protection pays out until retirement; death; or your return to work. Short-term income protection pays out for a set period, usually between one and five years. 

Action point: Income protection doesn't usually pay out if you are made redundant, but will often provide 'back to work' help if you are off sick.

Payouts are usually based on a percentage of your earnings: 50% to 70% is normal, and payments are tax free. Income protection policies only pay out once a pre-agreed period has passed - generally ranging from one to 12 months after you put in a claim. 

The longer the 'deferral' period you choose, the lower your premiums. For example, if your employer pays your salary for six months, then you'll need cover to start from the seventh month of sickness (i.e. a six-month deferral period).

Types of income protection policy

Long-term income protection policies pay out until a fixed age; death; or your return to work. They are underwritten at the point of applying for the policy, rather than when you put in a claim. This means you will know exactly what cover you have from day one, as well as any pre-existing conditions for which you are not insured.

Types of long-term income protection include:

  • Guaranteed - Premiums won’t go up unless you increase the level of cover. These policies are the clearest.
  • Reviewable - Can be cheaper at the beginning of the policy term, but the price can go up after a set number of years or with as little as 30-days’ notice.
  • Age-related - The premium starts cheaper but goes up by a pre-agreed amount each year as you get older.

How much does income protection cost?

Your occupation; gender; and smoking habits will influence income protection premiums.

Premiums can vary hugely and depend on a range of factors:

  • Occupation - Most insurers group jobs into four categories of risk. For example, clerical workers will usually be in group one; shop assistants in group two; plumbers in group three; and construction workers in group four.
  • Deferral period - The longer you can wait to receive a payout once you have submitted a claim, the cheaper your premiums will be.
  • General state of health - Pre-existing conditions will often be excluded, but some insurers may cover you in exchange for higher premiums.
  • Whether you smoke - Most insurers will charge you much more if you are a smoker.
  • The level of cover you need - Subject to maximum cover levels, the higher the level of protection you choose, the more you will pay.

Think that this sounds like overkill? 

Let’s look at the alternatives. Most employees will be entitled to claim Statutory Sick Pay from the Government after 4 days absence which currently stands at £87.55 per week, giving an annual income of £4552.60. 

This is payable for 28 weeks and if you are still unable to return to work you will be individually assessed and offered Employment Support Allowance. 

The amount payable is determined by your personal circumstances so isn't a designated figure such as SSP.

Even if you earn £10,000 per annum, relying solely on SSP will no doubt cause you to have a drop in income and therefore cause you financial stress. 

This is not something that is likely to aid your recovery. Which person would you prefer to be: the one with financial security (which would encourage a speedy recovery) - or the one worrying that your house may be repossessed because you are struggling to pay your mortgage?

Independent financial advisers at Aberdein Considine can assist you with these options in more detail and help you secure financial security. Give us a call to find out more.

Kenny Mantle, Financial Advisor


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