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What is income protection insurance?
If you become sick or have an accident and are unable to work, or suffer redundancy, how long do you think your savings would cover your living costs? Good income protection could support you.
Income protection is a type of insurance that pays you a monthly income if you have to stop working, due to illness, injury, or redundancy. Here are some of the things you need to think about before applying for a policy:
- What you want the pay-out to be: This is the income you will get paid.
- The length of term: The length of the policy
- The costs of premiums: This is how much the policy will cost you on a monthly basis.
There are a variety of different income protection insurances out there that can cover you for:
- Accidents: If you are injured and cannot work for any reason
- Sickness: If you become seriously illness and cannot work
- Unemployment: If you are made redundant.
How does income protection insurance work?
Income protection insurance comes in different forms:
- Level cover: Pay-out and premiums are fixed for the term of the policy
- Inflation linked cover: Pay-out and premiums go up in line with inflation each year
There are two types of insurance premiums too:
- Guaranteed premiums: You pay a fixed premium during the policy’s term. Although inflation linked cover will still see premiums and pay-outs increase each year in line with inflation.
- Reviewable premiums: You have fixed premiums for a set period of time but after this the policy can be reviewed to adjust pay-out and premiums.
Who can get income protection insurance?
Income protection is available to anyone who falls into the following categories:
- People in full time employment
- People in part time employment
- Self-employed people
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Do you need income protection insurance?
If you have plenty of savings that can cover your income if you became out of work, you may not need it, but if you do not then an income protection policy could be a life saver.
What cover do you need?
To decide what cover you will need, you need to think about:
- How long you want to be covered for
- The percentage of your income you want to be covered
How much cover do you need?
Most insurers will let you specify the amount or choose a percentage of your existing income, to be covered.
They may have an upper limit for cover that may prevent you getting the cover you need.
To help you decide how much income protection to choose, it’s a good idea to write down how much you spend on a monthly basis and ensure you are covered for that amount, for example:
|Living costs||Monthly amount|
|Mortgage or rent payments||£1,000|
|Insurances, e.g. home, car||£100|
|Minimum income needed||£1,700|
What length of term should you choose?
There are two types of terms available:
- Short term: Normally around 12 months. These are usually cheaper than long term policies.
- Long term: Cover for a set term, usually up to your retirement age or a set period like 40 years. Less restricting than short term cover.
What is a deferred period?
Most policies will have a deferred period, that is the time between making a claim and receiving pay-outs. You can set this period when starting the policy and the general rule of thumb is the longer the deferred period, the cheaper the premiums.
It’s important to ask your employer how long they will pay you if you cannot work due to illness or injury. If they pay you for six months then choosing a six month deferred period could save you money.
How much does income protection insurance cost?
Costs are based on a number of factors:
- Your Age: The younger you are, the cheaper your policy will be. There will often be an upper and lower age for taking out policies.
- Your Health: You may be required to complete a medical questionnaire when applying that will ask things like “have you ever smoked.” The less medical problems you have, the cheaper premiums will be.
- Income required: This can be as a percentage of your annual income. The higher the amount, the more expensive monthly premiums will be.
- Length of cover required: The shorter the term, the cheaper the insurance.
- Length of Deferred period: The longer you have to wait for a pay-out, the cheaper monthly premiums will be.
When does an income protection policy pay out?
On setting up a policy you can generally choose to have income paid out when:
- Straight after claiming: This is usually the most expensive option but you are paid out the moment you are unable to work
- After a set term: With this option you have to wait a fixed period after claiming for a pay-out to start. If you employer pays you for so many months after you are sick this could be a good option and will reduce premium costs significantly.
Most income protection policies have an upper age limit for how long a policy can run, usually 70.
If you only need cover for a short, fixed period, like 12 months, you could choose a short term income protection (STIP) policy instead as premiums are generally much cheaper.