The aim of Income protection insurance is to pay part of your income if you become unable to work because you’re ill or injured. Income protection can be set up to pay out if you are unable to perform your own occupation which tends to be the more expensive option, or if you are unable to perform any occupation it can be cheaper. The policy will be likely to pay out to the end of the term of the policy from when you are diagnosed with a payable illness.
We will advise you on the factors that you need to think about and what will be the most cost efficient policy to meet these requirements. Clearly the level of cover is going to drive the cost and should be enough to meet your outgoings, but also the deferment period though which you will wait to receive payment is going to be very important both in terms of being able to manage and also, again for the cost of the cover.
What is Income Protection?
Income protection (sometimes called Permanent Health Insurance) pays you a regular income if you can’t work because of sickness or disability. The Covid-19 Pandemic has highlighted just how vulnerable we all are if our income should cease for any reason.
While the Government has put in place financial support for those who have been furloughed or are self isolating, should you become ill and be unable to work, currently you can only claim Statutory Sick Pay (SSP) of £95.85 per week for up to 28 weeks.
It’s important to ask yourself:
- What is my monthly cost of living?
- How long could I live off my savings and pay my bills without a regular income?
- Could I afford to live on SSP alone?
- Does my employer offer any cover above SSP if I am ill, and if so, how much?
The amount of income you are allowed to claim will not replace the exact amount of money you were earning before you had to stop work. You can expect to receive about a half to two-thirds of your earnings before tax from your normal job. This is because some money will be taken off for the state benefits you can claim, and also the income you get from the policy is tax free.
You can’t claim income protection payments straightaway if you fall ill or become disabled. You usually have to wait a minimum of four weeks but payments can start up to two years after you stop work. This is because you may not need the money straightaway as you may get sick pay from your employer or you may be able to claim statutory sick pay for up to 28 weeks after you stop work.
There are two types of income protection available:
- Long-term income protection
This is the most common type of cover. It pays an income benefit for the entire length of the policy (typically to retirement age) if you are unable to return to work due to illness or injury.
- Short-term income protection
This is the second type of income protection and is designed to cover you for a limited time period, typically one or two years.
This is much cheaper than long term cover, though you are of course exposed to the risk of still being unable to work at the end of the pay-out period.