WHAT IS INCOME PROTECTION INSURANCE?
Income protection can cover short or long-term illness and can provide regular income based on the level of cover and term chosen Income protection (IP) is an insurance policy that pays out if you’re unable to work due to injury or illness.
IP usually pays out every month, and different options are available based on your needs. It can also pay until retirement, death, or your return to work, although short-term IP policies are now available at a lower cost. IP doesn’t usually pay out if you’re made redundant, but will often provide ‘back to work’ help if you’re off sick.
Millions of us have policies like private medical insurance & Life cover. The one protection policy every working adult in the UK should consider is the very one most of us don’t have – income protection.
HOW MUCH DOES INCOME PROTECTION PAYOUT?
Income protection payouts are usually based on a percentage of your earnings. Payments are tax-free.
IP policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the ‘deferral’ period you choose, the lower your premiums. Different deferral period options are available.
Most IP providers report paying high proportions of claims made to them. For 2012, insurance giant Aviva published that it had paid 93.5% of IP claims whilst LV paid 88.4%. British Friendly and Friends Mutual paid out 97% and 98% respectively, medical insurance & Life cover. The one protection policy every working adult in the UK should consider is the very one most of us don’t have – income protection.
GUARANTEED RENEWABLE AND AGE-RELATED IP
Once you’ve chosen the type of policy that meets your needs, there are three price bases to choose from:
- Guaranteed: Your premium payments are fixed throughout the term of your policy.
- Reviewable: Your insurer may change your premium payments throughout the term of your policy.
- Age-related: This means that your monthly premium will start at a lower amount than a Level policy and is recalculated every year based on your age and any benefit amount increases.
WHY DO I NEED IP?
According to research by Unum and Personnel Today, just 12% of employers support their staff for more than a year if they’re off sick from work. Given the low level of state benefits available, everyone of working age should consider IP, but when we asked the public, just 9% said they have some form of IP, compared with 41% who have life insurance and 16% who have private medical insurance (PMI).
One industry survey showed less than a quarter of people deemed protecting their income to be essential, compared with 74% who said the same of needing access to broadband internet.
Is income protection the same as PPI?
Let’s be clear – income protection isn’t the same as the widely mis-sold payment protection insurance (PPI). Where PPI covers a particular debt and any payouts go to your lender, income protection hands you a tax-free percentage of your income if you’re unable to work due to illness or injury. How you spend the money is up to you.
TYPES OF INCOME PROTECTION
Long-term income protection
This type of IP policy pays out until a fixed age, death or your return to work. It’s underwritten at the point of applying for the policy, rather than when you put in a claim. This means you’ll know exactly what you’re covered for from day one, as well as any pre-existing conditions you’re not insured for.
Short-term income protection
Like long-term income protection, this type of policy is fully underwritten when you take out the cover. However, rather than pay out until death or retirement, short-term income protection, known as Stip, has a fixed maximum payout period of between one and five years.
Accident, sickness, and unemployment (ASU) cover
ASU providers may screen potential customers, but do not conduct full medical underwriting at the outset. Cover tends to be cheaper than IP, but you have less certainty that you’ll be covered when you come to put in a claim. As the name suggests, ASU policies cover you for unemployment.
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