What do I need to know?
My goal is to help you find the best Income Protection Policy. Both good and bad headlines about Income Protection have dominated the news. It’s important to look into the benefits of Income Protection and help clear the air.
Income Protection is one of the least used types of Insurance around and there’s a good reason for that. Most of us overlook protecting our Income because it’s guaranteed as long as you are in work or claim maternity leave. The fact we tend to overlook is that If you have to stop working for some months, years or even longer due to illness or injury, what finances would you have in place to keep up with all your monthly outgoings?
In many cases people drain their savings within the 1st year and end up having to rely on benefits. With the low values of Employment Support Allowance, long term incapacity would mean a notable change in living standards for your household. To be eligible for ESA you need to go through a strict Work Capability Assessment – it’s not guaranteed.
Other than savings, the only solution for most people to protect their earnings is to take out Income Protection Insurance. This type of cover pays out a monthly income if you have to take time of work due to sickness or injury and can payout either until you are well enough to return to work or you reach the end of the policy term.
How does this cover work?
It starts with accessing how risky your job is. In most cases it’s possible to take out a plan with an ‘own occupation’ definition of incapacity. Income Protection pays out if you are unable to perform the duties of your own job due to illness or injury. The plan continues to payout each month (tax-free if personal policy or under PAYE if taken out via employer) until you are fit to return to work or you reach the policy end date, which is usually set at the age you expect to retire.
For example; if you are off work for 5 years whilst recovering from cancer the plan could cover your earnings for the entire time. You would need to be off work for a certain period of time before the plan would start paying out. This is called the deferred period. They can be as short as 4 weeks or as long as 52 weeks. The policy needs to be underwritten by the insurer.
Underwriting is the process whereby an insurer assesses an insurance application. Depending on the level and type of cover you are after this may require you to undergo a medical. One thing to bear in mind is that pre-existing medical conditions will likely be excluded from any policy, or in the best case lead to your premium being increased.
Should you be worried about insurers not paying out on this policy?
Common claims are for conditions such as stress, back pain, cancer and heart disease. Leading insurers usually report claim payout rates of over 90 percent. Payouts are turned down in cases where the customer did not read the small print. For more on what to look out for in a policy see the next 2 sections.
Key policy options
Consider these before taking out a new plan:
AMOUNT OF COVER – Consider your essential monthly outgoings and base the amount of cover on expenses rather than earnings. It is usually possible to insure up to 65 percent of your pre-tax personal income. With income protection for directors it is also possible to cover dividends as well as salary;
LENGTH OF COVER – The usual is to set the term length of the plan at the age you expect to retire resulting in a protection of lifetime earnings. The most common termination age is 65 years old but some insurers can provide cover up to the age of 70;
DEFERRED PERIOD – It makes sense to align the deferred period with the length of time you would have savings sufficient enough to cover your expenditure and, if appropriate, the period of time your employer would pay full sick pay.
INCAPACITY DEFINITION – Different policies have different definitions of what it means to be incapacitated;
— Own occupation – as described earlier.
— Any occupation – means that the insurer will only pay out if you could not do any occupation, and not necessarily your own occupation.
— Work tasks / activities of daily living – This is the least generous of the incapacity definitions. The insurer will only pay out if you can’t complete a set number of tasks, such as walking up stairs or holding a pen.
Instinctively the most appropriate policy option will vary from person-to-person based on their specific circumstances so it is worth speaking to a Business Consultant to find a plan with the most advantageous terms.
What should I watch out for in an income protection policy?
INCAPACITY DEFINITION – Definitions vary greatly and often people will take out income protection policies thinking they are covered should they be unable to do their own job. This is not necessarily the case, especially if you have a work task definition.
SICK PAY – If your employer provides long term sick pay then this will restrict the amount of cover you can have under an income protection policy.
COST – Income Protection can be expensive so get in touch to discover the best deal. Always make sure the policies are comparable.
NON-PERMANENT CONTRACTS AND INTRODUCTORY PERIODS – Beware that some policies may stipulate that you can’t claim within a certain time period from the date you started a job or took out the policy.
OVER INSURING – Avoid over insuring yourself! There are limits to the amount of income protection you will be able to take out. If other types of insurance you have, such as health cover, provide salary replacement, in the event of illness this will be offset against your income protection policy.
Find the best value income protection policy for you
For a review and quote get in touch with me Anthony Paul, your business consultant.
Anthony Paul 