How would you cope if your income suddenly stopped due to an illness or injury?
Statistics from Santander suggest that one in five people in the UK have no savings at all to fall back on, meaning a worryingly high number of people are financially exposed.
According to the Association of British Insurers, over 670,000 men aged between 40 and 64 were off work for more than six months in 2015 due to an illness or injury.
Enter Income Protection; a type of insurance designed to prevent a bad situation turning worse. But, as with most types of insurance, awareness levels are relatively low, and people are dubious to the value of it. So, what exactly is Income Protection, and who is it right for?
What is income protection?
There are various types of income protection available, with policies tailored for individuals with a wide range of circumstances. Put simply, however, it is a type of insurance that protects you from loss of income due to factors such as illnesses or injuries.
These policies are designed to help you with the cost of living should your income suddenly stop.
Income protection, also known as Permanent Health Insurance (PHI), works in a similar way to any insurance policy. You pay a monthly premium (the amount dependant on the level of cover and a range of other factors), and claim if you are ill or have an accident.
What are the benefits?
One of the biggest benefits from income protection, is providing payment in situations were sick pay isn’t available. For example, long-term injuries and illnesses may go beyond the 28 weeks that Statutory Sick Pay (SSP) is paid.
And of course, that’s only if SSP is available at all.
Self-employed people are not entitled to this benefit, meaning that long periods without a regular income could put them in severe financial difficulty.
Most policies pay up to 50% of the holder’s gross salary, tax free. This ensures that any large outgoings, such as mortgage payments and rent can be kept on top of. Times of illness or injury are
never pleasant, and the thought of falling into financial difficulty is an extra layer of worry that won’t be welcomed. Having an income provided not only allows you time to heal or recover, but it ensures that your family don’t suffer as a result.
Another benefit comes in the flexible nature of the policy itself. Generally, there are two types of each policy:
- Long-term: These policies pay out until you are able to return to work
- Short-term: Generally cheaper; these policies pay out for a set amount of time, and end whether you are fit to work or not
This flexibility means that you aren’t paying more than you have to if your injury is short-term, making it more accessible to those that may not be able to afford a long-term policy.
How much does it cost?
Like most health-related insurance, your monthly premium will be affected by factors such as:
- Smoking status
- Level of health
- Age (premiums generally increase with age)
When does income protection pay out?
Like Critical Illness Cover, Income Protection has a reputation for not paying out. This simply isn’t true; in fact, in 2016 84.7% of all claims were paid out, with almost £500 million paid out in total (Source: ABI).
To be able to claim, the policy holder must be considered ill enough to match the pre-agreed definitions in their plan. Common definitions include:
- Own occupation – policy pays out if you are unable to do your own job
- Suited occupation – policy pays out if you are unable to do a job with similar skills and experience
- Works tasks – policy pays out if you cannot perform a certain number of activities from a specified list
Each provider will have slightly different terms and conditions, so policies should be fully understood before anything is signed.
Who is it right for?
As with all protection, everybody will have slightly different circumstances. What is right for one won’t be right for another, but as a general rule:
- Anybody who would struggle to make ends meet if their income suddenly stopped
- Anybody with dependents
- Those without benefits at work
- Self-employed people
- Employees who have outgoings above what SSP pays out
If in doubt, talking to a professional financial adviser can help. Insurance can be complex at the best of times, and taking advice can ensure that you and your family are protected, should something unpleasant happen. For more information get in touch using the phone number at the top of the page.