With all the stresses of daily life, it’s no wonder that we can fall ill from time to time, and a few days off from work can be quite literally what the doctor ordered. But what happens when days turn into months?
Being incapacitated from work due to illness or injury can disrupt not only your daily routine but your income too, preventing you from making a living. That’s where income protection cover comes in.
Income protection insurance is designed to provide a benefit to you if you’re out of work due to an illness or injury which stops you from doing your job properly. The payments you receive are on a monthly basis and are designed to replace 50-70% of the gross income you’d usually be earning, so you know you’ll still be able to finance your family and lifestyle even if you’re out of work.
Sounds great, right? Well as far as insurance policies go, if you’re looking to protect yourself and your livelihood then this may be just the thing for you, yet it’s clear that the benefits of this insurance aren’t quite as well-known as they should be. According to a study by consumer group Which?, while 41% of individuals asked had life insurance, only 9% had any form of income protection. Considering the fact that you are three times more likely to be ill for 6 months than to die during your working life, it’s clear that we should all be giving more thought to income protection.
Know before you buy
Whilst income protection cover provides you a good deal of peace of mind, there are a few things you should bear in mind before purchasing your policy.
1. Type of cover
Firstly, the type of cover you choose is all important. There are many different aspects to think about, although your level of cover is a good place to start. There are three different definitions of incapacity your policy will use, affecting the circumstances in which you can make a claim. These are “own occupation”, the highest and most expensive level paying out if you are not able to carry out your own job, “suited occupation”, in which you’re unable to carry out your own job or a similar one suited to your qualifications, and “any occupation”. This last definition only pays out if you are too ill to do any kind of paid work, providing far less earnings protection than the other two types but being the cheapest. As such, this latter category is largely discouraged by consumer groups.
2. Price base
Your price base is also important when it comes to purchasing your policy. This may be guaranteed, reviewable, or age-related. In a guaranteed policy, the price you pay will stay the same throughout the term, with your premium only increasing if you want more cover.
A reviewable policy usually starts a little bit cheaper than a guaranteed policy but your monthly premium will be reviewed every 5 years, meaning that your insurer will be able to increase the price, with some even holding the right to do this with as little as 30 days’ notice.
Age-driven policies are better for smokers and people who are in higher risk jobs as these attributes aren’t always factored in when calculating your premium. Instead, the policy is devised to increase in price as you get older. While this does mean that you are guaranteed to see a steady increase across the term of your policy, this inflation is calculated when you first take it out, so it won’t come as a surprise.
3. Employer benefits
When it comes to any sick-pay benefits you may receive from your employer, be aware that these will have an effect on your payments – most plans will not pay out if you’re still receiving your typical income from your employer, even if you’ve passed the date you wish your payments to start (deferment period). Income protection cover is designed to substitute rather than supplement your earnings, so be aware of this. On the other hand, if your employer reduces your monthly pay to half then you may see some payouts on your policy, but check the wording beforehand.
4. Long term vs. short term
Lastly, a simple but important point to note is the difference between long and short term income protection policies. Both are underwritten at the point you take out the policy, so you’ll know what you’re covered and not covered for (such as any pre-existing medical conditions) from the start. The main difference is the period in which they’ll pay out – short term policies have a fixed maximum period. These vary in length but are usually no longer than 5 years. In contrast, a long term policy will pay out until your return to work, a fixed age, or, quite understandably, your death.
So there you have it. When it comes to income protection insurance, make sure to have a good look at the policy before purchasing. However, this guide should prove a good starting point, hopefully helping you understand income protection that little bit better. To start planning your finances now, visit our Income Protection quotes page.