What are the benefits of income protection insurance?
What is income protection insurance?
Income protection cover (or permanent health insurance) is a type of insurance policy that pays you a regular replacement income if you cannot work due to illness or injury. It doesn’t cover redundancy or losing your job.
It’s different from critical illness cover, which pays a lump sum if you become seriously ill, or a life insurance policy that pays out when you die. Income protection benefit is also different from payment protection insurance which pays a specific debt if you can’t.
How does income protection insurance work?
Income protection pays a monthly sum that replaces part of your income if you can’t work because of an accident or illness.
There may be some exclusions on your policy. Still, generally speaking, your payments will continue until you can return to work, get to retirement age, die, or reach the end of your policy term.
When you’ve found the right policy, you pay a monthly premium for as long as you need coverage.
Do you need income protection insurance?
Income protection cover is a good idea if you want the reassurance of knowing that your bills and day-to-day expenses will be covered if you’re unable to work due to illness or injury.
However, it’s worth considering whether you may already have insurance or other resources in place before you buy income protection insurance.
Do you already have income protection coverage?
Before you buy a separate policy, it’s worth checking whether any of your existing insurance includes an income protection element. This could be a life insurance policy or mortgage protection insurance. These policies could cover some of your most significant expenses when you’re unable to work.
Check with your employer
When considering whether to buy income protection insurance, it’s worth conversing with your employer to know exactly where you stand regarding sick pay. Some employers only pay statutory sick pay during an absence, while others have a more generous package of benefits. If you decide to take out an income protection policy, this can help you to decide what level of coverage you need.
You may find that your employer already provides income protection insurance as one of your employee benefits.
Savings
If you have savings, you might prefer to rely on them rather than pay for insurance. However, if you’re unable to work for a long time, you may not have enough savings to cover your monthly outgoings.
You might also find yourself without any resources to deal with other emergencies in the future.
Different types of insurance policies
Income protection insurance isn’t the only type of illness or injury cover on the market, so it’s worth investigating whether this is the correct cover for your circumstances.
Income protection cover can be costly, and a cheaper option may provide you with the necessary coverage.
Critical illness cover
Critical illness cover pays out a lump sum when you’re diagnosed with a serious illness. Critical illness insurance covers serious illnesses that may prevent you from working long-term, such as heart attacks, strokes, cancer, multiple sclerosis or Parkinson’s disease. Some policies will only pay out if you’ve been left severely disabled.
You’ll only get one payment from this type of policy, as opposed to long-term income protection, which can keep making monthly payments for as long as you need them. It’s a cheaper option, but you’ll need to budget carefully.
Accident, sickness and unemployment cover
Accident, sickness and unemployment policies offer short-term income protection that gives you a monthly income during a fixed period, typically around one to two years.
They exclude pre-existing medical conditions, so they won’t pay out if you’re unable to work due to an illness you had before you took out the policy. However, these insurance policies don’t offer medical underwriting, so you may not know what’s covered until you make a claim.
As the name suggests, you can get cover for involuntary redundancy, which isn’t available with either income protection insurance or critical illness insurance.
How much does income protection insurance cost?
The amount you can expect to pay for your monthly premium will vary depending on several factors. Some relate to your personal circumstances, while others relate to your chosen policy.
Your age
The cost of your insurance will increase as you age, whether you’re looking for long-term income protection, life insurance or a health insurance policy. Because you’re more likely to experience ill health as you age, your insurance company increases the premiums to cover the risk.
Whether you smoke
Many insurers will charge you more if you’re a smoker. A smoker is classed as anyone who has used nicotine in the last 12 months, so it could even affect you if you vape or use nicotine patches to give up.
Your medical history
Income protection policies usually use medical underwriting, so your insurance company will look at your medical history to provide a quote. Suppose you have a pre-existing medical condition that may affect your ability to work in the long term or reduce your life expectancy. In that case, there are several approaches that an insurer might take.
Some will decide to cover you at no additional cost depending on your overall level of risk. They may cover your pre-existing condition but increase your monthly premium. They could also reduce your premium but exclude that condition. That’s less than ideal if your pre-existing illness is why you decided to get insurance.
Your work
While a desk job might carry some health risks, your insurer won’t classify it as a high-risk profession when calculating your premium. You’ll pay more if you have a manual job, such as construction, carpentry or farming. Some jobs also expose you to direct risks, for example, offshore work or firefighting. Your insurer will increase your premiums to reflect the risk.
Your hobbies
Believe it or not, how you spend your spare time could also mean you pay more for your income protection insurance. If your weekends find you free climbing, scuba diving or engaged in aerial sports such as hang gliding or base jumping, you can expect to pay more for your insurance.
How much cover do you need?
When you’re thinking about taking out income protection cover, it’s essential to consider how much coverage you’ll need, as the amount your policy pays out will be reflected in the premiums you pay.
Income protection policies pay a percentage of your earnings, so you’ll need to look at your monthly outgoings and determine what essentials your insurance will need to cover if you can’t work.
How many years of cover will you need?
Your premiums will increase with age, but they’ll also reduce if you only need a few years cover. For example, if you can claim your pension at 55, you’ll need less income protection cover than if you have to wait until you’re 65.
Your deferred period
Every income protection insurance policy has a deferral period which is the time that elapses between you becoming ill and when your income protection pays out. This can range from one week to more than a year.
If your employer only pays statutory sick pay for any absence, you’ll likely need a shorter deferral period than if they pay you in full for six months. The longer your waiting period, the lower your premium will be.
Whether you choose guaranteed premiums
There are three different types of premiums for income protection insurance. Age-banded premiums increase as you age, so you’ll pay more each year.
If you choose reviewable premiums, your income protection insurer can change the amount they charge because they’ve generally had high claims.
Guaranteed monthly premiums won’t change and will stay at the same level throughout the policy’s life. This can mean that your premiums are higher at the start of the policy but may cost you less over the years.
How much does income protection insurance pay?
We’ve already mentioned that your income protection policy pays a percentage of your usual earnings each month. Your monthly benefit amount will typically be between 50% and 70% of your salary.
You can adjust the percentage, which will be reflected in your premium. The payments are tax-free, so you only need to cover your net salary rather than your gross salary. You can work out the figures here.
Are there any exclusions?
Just like health insurance, income protection insurance has several standard exclusions. Each income protection insurer has its exclusions, so it’s important to check terms and conditions before you take out a policy.
Some common standard exclusions include:
Alcohol or drug abuseSelf-inflicted injuryCriminal actsHIV or AIDSPregnancy and childbirth; this relates to straightforward pregnancy and may not apply if you’re unable to work due to pregnancy-related complications.WarDisability resulting from a failure to follow medical advice
You may also be unable to claim if you have a policy in the UK but live abroad.
Some insurers will also include other specific illnesses, for example, mental health conditions, even if you need to take time off work. That’s why it’s essential to check the small print.
Pre-existing conditions
Your insurer will look at your medical and family medical history and may exclude some medical conditions. These could be illnesses you’ve had before, or they might attach conditions to your policy due to your family medical history.
Other work
Your policy may not pay out if you can’t do your own job but can do other types of work. This may be a practical option for some people, for example, if you’re self-employed and have more than one income stream, but it may not be for others.
Are there different types of income protection insurance?
Different types of protection calculate payments and pay out in different ways. A specialist broker or independent financial adviser can guide you through your options.
Index-linked
We’re all mindful of the effects of a rising cost of living, and it’s worth considering how that could impact your future income protection payments. If your income rises in the future, you may want the amount your income protection pays to reflect that.
If this is the case, you can opt for an index-linked policy that tracks either the consumer prices index or the retail prices index each year. It also means that your premiums will increase each year.
Stepped benefit
If your employer only pays statutory sick pay during an absence, you’re likely to need protection that pays the same proportion of your salary throughout your claim period. However, a stepped benefit policy may be better if your payments drop in stages as your absence continues.
This allows you to receive a lower payment while still receiving a proportion of your salary, which increases when your payments drop to the level of statutory sick pay.
What else could income protection insurance cover?
There are a few optional extras that you may be able to include if your insurer offers them.
Premium waiver
This option allows you to stop paying your premiums whilst receiving payouts from the policy.
Payouts for hospital inpatient treatment
Some policies allow you to claim if you’re admitted to the hospital, even if your deferred period hasn’t ended yet.
Payments when you return to work
If you need to return to work on reduced hours or lower pay, this option means that your policy will pay a reduced rate when you go back to work.
Life insurance
Most policies include life insurance which pays the equivalent of one or two years’ monthly premiums.
No deferred period for reoccurring illness or injury
If you’ve made a claim and have another absence from work within the same 12-month period, you won’t have another waiting period before you can claim again.
Can income protection insurance affect state benefits?
If you receive government benefits, could income protection affect these? Changes in the benefits system mean this is increasingly likely to be the case. Government benefits are being consolidated into a single, Universal Credit payment and are assessed based on your earnings and any other income you receive. When you receive income protection, it’s treated as unearned income, so your monthly benefit payment is likely to reduce.
How to get professional advice on your income protection insurance
If you’re thinking of buying income protection insurance, life insurance or critical illness cover, myTribe will help you to compare income protection insurance and find the policy that suits your individual circumstances.
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