Income protection insurance is an essential type of insurance for most individuals, but many people fail to act until it is too late. Nowadays most people are able to take out income protection insurance, which will pay out a regular tax-free income if they are unable to work as a result of long-term sickness or disability.
It is a common argument between financial planning experts that income insurance should be a main priority for most people when it comes to financial planning.
Who needs income insurance?
No matter how much attention is paid towards diet, exercise and general health, there is no guarantee that you will avoid being a victim of an unfortunate accident or avoid being diagnosed with a serious illness. In fact, recent research has shown that there is at least a 25% chance that a person will need to claim on an income protection insurance policy during their working lifetime.
Unfortunately bills will keep on coming even if you are suffering from a disability or a long-term sickness, so going without income protection insurance could be tempting fate.
Those Generous sickness benefits are usually on offer to people in very good jobs and these may extend right up until the date upon which they had intended to retire. The majority of employees with long-term health problems will, on the other hand, find themselves having to rely on the state, which is likely to prove hard.
The exact amount of state help that will be available will vary according to factors such as your age, savings levels, number of dependants and housing situation, but you can be sure that it will never allow you to do anything more than to make ends meet.
However, income protection insurance can enable you to receive benefit payments of up to around half your income if you are unable to work due to long-term health problems. These payments will continue until you recover or, if you fail to do so, until the end of the policy term – which is usually your intended retirement date.
Confusion about income insurance
Frustratingly, income insurance can be referred to under alternative names, most notably “income replacement insurance” and “permanent health insurance (PHI).”
These titles are entirely interchangeable with income protection insurance but, just to complicate matters further, the product is also commonly confused with a significantly different one called payment protection insurance.
How does it work?
Income protection insurance is frequently better value than any kind of payment protection insurance, although it does have its downsides such as it being more complex to understand and can take longer to arrange. This is because those who apply for income protection insurance have to be underwritten individually at outset.
All applicants have to answer a detailed health questionnaire and, if the underwriter requires further information, it may write to your GP or ask you to undergo an independent medical examination with a doctor in your area.
This detailed underwriting can take several weeks to process and can also mean that you have exclusions imposed for medical conditions that you have already suffered from.
Period & amount of cover
The amount of monthly cover you choose will affect your premium amount, as will the length of the cover period, and the length of the initial “deferred period,” which is the amount of time that elapses between when your claim occurs and when the benefit payments actually start.
The shorter the deferred period, the greater the cost. A deferred period of anything between one month and one year is possible, but in practice most people opt for either six months or three months.
Exactly which insurance company you select will also have a major bearing on prices, because some offer much better value for income protection insurance than others. Remember that the company with the cheapest premiums does not necessarily represent the best value.
Seeking help & advice
Getting advice or extra help on this complex field can be worth it as you want to ensure that you end up with a suitable policy. You can seek professional advice from an independent Financial Adviser (IFA).
Most IFAs earn their remuneration from commission paid by insurers, meaning that their services effectively cost the consumer nothing – insurers will not usually refund this commission element to consumers, even if you deal with the insurer directly.
IFAs can save you money by shopping around the market to ensure that you get the best value deal, but remember to establish exactly what cover you already have to protect against ill health (may involve having to contact your HR department), before consulting an IFA.
Key points to remember:
- The bills will still keep coming, regardless if you are ill or made redundant.
- State benefits will not enable you to do more than subsist.
- The cheapest income protection policy does not necessarily mean the best value.
- Don’t confuse income protection insurance with payment protection insurance.
- Make sure you buy income protection insurance via an IFA or income insurance provider.
- Remember to read the small print, providers can have significant differences in their small print conditions so be aware.