If you are unable to work as a consequence of illness/injury, then income protection can provide you with a degree of financial security until your situation improves.
The ability to maintain mortgage payments, credit card payments and loan payments during what can be a difficult time would be extremely useful.
There are various types of income protection available with the ability to build a policy around your particular requirements.
Income protection covers up to 70% of your wages if you're too sick or injured to work. You can also get income protection to cover redundancy or other unemployment. It will help you keep up with regular bills while you recover.
Historically, many people believe that income protection insurance is too expensive, but competition in the marketplace has led to improved value for money.
There are also numerous options available which are extremely useful because there is no one size fits all solution to this problem.
So, what are the main benefits of income protection, and why might it be useful to you?
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Traditional income protection policies will cover you for illness/injury, which prevents you from working. Each insurance policy will specify the illness/injuries covered, which is often very specific to the individual, their medical history and that of their family.
It is very important that you are fully aware of the degree of cover offered by your income protection policy. There is also the opportunity to add other types of protection, such as for example, unemployment/redundancy cover.
The traditional level of payment is between 50% and 70% of your gross monthly income based on your salary at the time you took out the policy. It is very important to note that this payment is based on your gross monthly income, and there is no additional tax to pay on the insurance payments.
A significant element of the difference between the policy payment level and your gross income is made up of tax and other charges deducted from your salary - therefore the reduced level of payment is not as low as it may seem.
There is the option to defer payment in the event of injury/illness, which prevents you from working. This is very useful where, for example, your employer has decided to go above and beyond their statutory sick pay obligations to cover enhanced payments. If your enhanced sick pay element lasted for 12 months, then you could defer payments from your income protection policy for 12 months.
In the event that you are still unable to work after the 12 month period then your income protection payments would kick in and make up the majority of the shortfall. So, your employer would cover the first 12 months with an enhanced sickness payment scheme then your income protection policy would take over.
How long your income protection payments would continue would depend upon the terms of your policy which could be a long-term policy or short-term policy (traditionally between 12 and 24 months).
There is no tax to pay on any income protection payments. This is a very important factor because it helps to explain the difference between the policy payment and your monthly salary.
There may be situations where your employer provides an income protection scheme for employees where the tax situation may be a bit more complicated. In this scenario, it would be best to take professional financial advice so that you’re not left with any unexpected tax liabilities.
Long-term income protection could see you receive monthly payments for many years if you are unable to work. Normally the protection would last until you are able to return to work or you reach a predetermined retirement date. In some cases, this could be ten years or 20 years or longer if you have a long-term illness/disability.
Therefore, it is worth asking about inflation/index-linked insurance payments so that you are able to maintain your spending power going forwards. For example, the spending power of £10,000 today would be severely diminished in 10 years’ time as a consequence of inflation and increases in the cost of living.
An inflation/index-linked payment policy would involve higher premiums simply because it leaves the insurance company with greater liabilities. However, in the event that you were unable to work for a prolonged period of time, it could offer significant financial assistance.
You will be asked to fill in a detailed questionnaire when applying for income protection which will include a section on existing medical conditions, family history, etc. It is very important that you are truthful and honest with regards to your history and any medical conditions you may have.
Historically, it has proven difficult to secure income protection where there have been pre-existing conditions, but things are changing. You may need to pay higher premiums, but there is every chance that you could secure a form of income protection that would appreciate (or exclude) pre-existing medical conditions.
This tends to be a specialist area of the market, and you should seek professional financial advice.
No. If you have an income protection policy and are prevented from working because of illness/injury, then you would receive payments direct. There are no restrictions on how you spend this money, although obviously, it would be sensible to continue with mortgage repayments, etc.
PPI varies dramatically from income protection because each PPI policy would cover one individual debt such as a mortgage, loan, etc. Therefore, if you had PPI protection for your mortgage and were unable to work for a period of time, the PPI policy would make payments directly to your mortgage provider.
In this article, we have focused on income protection insurance which protects an individual’s income to a certain extent. While the term payment protection insurance is often overlooked, it is best known as PPI; it does potentially have a role to play in protecting your finances.
If for example, you had savings or additional income, then it may be sensible to look at payment protection insurance as an alternative. This would ensure that your monthly payments are covered, personal loan payments, etc. so that you would at least have a roof over your head. This is potentially an interesting option for those with limited finances.
As we highlighted above, there may be occasions where payment protection insurance is more appropriate than income protection insurance. It is therefore sensible to take professional financial advice about your situation.
When looking at the type of cover and the level of cover you need, your insurance broker should also take into account your wider finances and investments. Remember, insurance brokers (as with all other financial advisers) have a very strict duty of care. If they fail to honour this duty of care, you could pursue them for compensation.
There is no hard and fast rule with regards to commissions/charges when using insurance brokers to find the perfect income protection insurance. What you do tend to find is that brokers are now more transparent as a consequence of recent legislation.
They are obliged to disclose charges and income from third parties. You tend to find they will work on one of three different structures for work undertaken for clients:-
Many people prefer to pay a direct charge for advice and action taken by insurance brokers. In the eyes of some customers, this removes the potential conflict of interest. We have seen brokers looking for the best deal but also conscious of the best insurance company commission rates.
The reality is that any company focusing purely on commission rates would be found out very quickly and brought to account by the regulators.
While many people will retain the original terms and conditions of their income protection policies for many years, sometimes your requirements change. For example, it is highly unlikely that your financial/personal situation would remain constant through your 20s, 30s, 40s, 50s and beyond.
Therefore, at some point, you may need to adjust your income protection insurance policy to reflect this. You may wish to extend the period after which payments commence, or you may even be looking to enhance your cover.
It is bizarre as to why so many people feel the need to separate insurance policies from their regular financial reviews. Income protection insurance more than most is directly related to employment, income and an individual’s overall wealth.
There is nothing wrong with reviewing all of your insurance policies at the same time that you review your investments/assets. If there are changes to make, then do it. Otherwise, everything will remain as it was going forward.
While some people see income protection as an expensive luxury, for many people, it offers a financial safety net in times of trouble. It is important to review the fine print in your income protection policy as certain medical conditions may be excluded.
The period of deferral is also very important and can be extremely useful if, for example, you are able to use additional income sources to fill a short-term financial void. An extended deferral period will reduce the insurance company’s liability and as a consequence, reduce your premiums.
Here at Money Savings Advice, we have partnered with some of the UK’s leading Income Protection Insurance brokers. They have already helped thousands of people get the best Income Protection Insurance cover and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.
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