On a basic level, what is income protection cover?
Should you become ill or injured, and unable to work for a period of time, this type of cover will support you by paying an agreed percentage of your income, potentially over many years, if this was required.
My employer offers me support if I’m off sick. Would I need income protection insurance on top of this?
Some employers offer substantial support for employees who become sick or injured for long periods of time. If you’re fortunate enough to work for a company that provides this kind of perk, you probably don’t need your own income protection policy.
Most companies provide a certain amount of support, in line with government guidance, and this tapers over time, after which you will have to access state benefits to support you financially.
Check with your HR officer, and look at your contract, to see what you would be entitled to if you couldn’t work. And then imagine if you couldn’t work for several years. At what point would you, or your dependants, become unable to maintain your lifestyle if you relied on your employer’s sick pay policy alone? If the answer is a year or less, and you don’t have significant savings, you should consider income protection insurance.
So if I’m ill or injured, will my income protection insurance pay out my full earnings?
Not the full amount. Pay outs are usually based on a portion of your earnings, usually somewhere between 50% and 70%, depending on the insurance provider. Some providers also offer a higher percentage on the first sum of money you will be paid out, followed by a lower percentage on anything you claim beyond that.
However, you won’t have to pay tax on any money you are paid as part of your claim.
How long will income protection cover pay out for?
Most providers will offer cover that means they will pay out until you retire, pass away or return to work. However, short-term policies can also be purchased, covering one- or two-year periods, at a lower cost.
It’s important to note that income protection won’t pay out if you are made redundant.
How do providers calculate the cost of my income protection premiums?
They will look at your age, and ask you questions about your lifestyle, such as how much you drink, or whether you smoke.
Also, the more risk an insurance provider attributes to a job, the more money they will charge for cover. Office based jobs are usually classed as low risk, for example. Meanwhile, those who do a lot of professional travel, work with heavy machinery, or on construction sites, are classed as higher risk.
What else will affect the cost of my premiums?
The period of time you choose between when you make a claim, and when the policy pays out, known as the ‘deferral’ period, plays a part in the calculating your premiums. Most providers offer a default deferral period of between three and six months, which takes into account the amount of sick pay your employer would pay if you were unable to work. However, if you chose a shorter deferral period, this would be reflected in a higher premium.
Many people also choose to ‘index link’ their income protection. This means that as the years go by, the amount you would get as a pay out goes up in line with inflation. Your premiums would then increase gradually, at usually just above inflation, to cover the costs.
Will I be covered for all illnesses?
Not always, so it’s important to look at the exclusions on any policy you are considering. Your insurer will likely look at your family medical history, and this may cause them to add conditions to you taking out a policy with them. For example, they may decide to class an illness that you or a family member has had in the past as a pre-existing condition, meaning they would not cover you for it.
If you’ve got income insurance on your mind, we can help you cut through the small print, avoid nasty surprises, and most importantly, get the right level of cover for a great price. Best of all? A chat with one of our friendly, helpful expert advisers will cost you nothing, and could save you more money than you think. Call us today.