12 Days of Christmas - Day 3, Income protection

On the third day of Christmas

Cura gave to me

Income protection

Income protection is exactly how it sounds, it’s put in place to protect your income. As well as life insurance and critical illness cover, income protection is one of the most popular types of protection insurance.

Income protection is a policy put in place to pay you a tax free monthly sum of money if you are ill and unable to work. The claim usually pays until you’re able to return to work, or until you have reached your chosen retirement age. Some policies pay out for a maximum of 12 months, 2 years or 5 years per claimable event, and some people find these more affordable than others.

The idea of an income protection policy is to ensure you can still pay your monthly bills and live comfortably, if you become too ill to work.

Income protection is commonly mixed up with accident, sickness and unemployment cover. A big difference is that income protection is a long term policy, it can pay a claim all the way to your retirement if you can never work again; if you choose this option.  Whereas accident, sickness and unemployment has a maximum payment period of 12 or 24 months.

But the Jargon!

There are a few terms which will be handy to know when applying for an income protection policy, as they will pop up often.

• Deferment period – this is the time period before your policy kicks in. For example, if you have a deferment period of 4 weeks, you will have to be off work ill for 4 weeks before you receive financial support from the insurer. The shorter the deferred period the more expensive it is. The times are usually 4, 8, 13, 26 or 52 weeks.
• Sum assured – this is the amount you will receive if you make a successful claim. It’s common to be insured for around 70% of your income, though you can choose to be covered for less if you want to.
• Policy term – this is how long the policy lasts for. It’s a good idea to match your state pension age, but you can choose less than this, or sometimes longer.
• Claim period – this is how long a claim will pay out for. The longer the potential claim the higher the premium is. It’s a good idea to get a price for a claim that can potentially pay all the way to your retirement.

It Will Never Happen to me

Some time ago the Seven Families put together a series of videos that show families that did not have income protection, and how much their lives have been changed by serious illnesses. It might feel like there is a low risk of you needing this, but the sad reality is that people do become too ill to work, and the UK state benefit system is not going to fully support you.

Our MD Kathryn Knowles did some research using an insurer’s website. She’s 36 and wondered what her ‘risks’ are. The results showed that the chance of her experiencing these events are

• 5% – chance of dying before retirement age
• 14% – chance of being diagnosed with a critical illness before retirement age
• 50% – chance of being unable to work for 2 months or more due to ill health
  
  

You can take tests like these yourself

https://www.lvadviser.com/online-services/risk-reality-calculator

https://www.legalandgeneral.com/adviser/protection/news-insight/deadline-to-breadline/calculator/

https://www.the-exeter.com/adviser/income-protection/income-risk-calculator/

I’m Still Not Convinced

At Cura we think it’s important to spread awareness and educate people on the importance of having protection insurance in place, and hopefully you can see why after reading the alarming statistics below.

• 1 in 5 households say they have no savings in place to rely on if they fall ill and cannot work.
• The average household is just 24 days away from the breadline, with less than £3,000 in savings.
• 30% of mortgage holders say they could only afford to pay their mortgage for a maximum of 2 months if their income was to stop.
• 1 in 8 people are forced to stop working before state pension age because of disability or ill-health
  
  

At a glance, it can seem like income protection is complicated and you might come across words or terms that you wouldn’t use ordinarily. I’m hoping that this article has given you more confidence on the topic.

There is lots of research into income protection and people’s financial situations, and it was found that only 9% of employed and self-employed people have income protection. That’s just 6% of the UK’s population having income protection!

Since the pandemic, 7 in 10 people see income security as one of their key priorities. Though it’s awful to think that it took a pandemic for people to be more in touch with income protection, it’s great to see that more people are starting to take the steps to ensure they have the protection they need. 

Many people know about statutory sick pay, but many don’t know how little this would actually give you, which is just £96.35 a week for a period of up to 28 weeks (GOV.UK, 2021). That’s £2,697.70 to live off for 6 and a half months!

Personally, I know that my bills could definitely not be paid by £96.35 a week, never mind being able to carry on with my usual lifestyle too.

In order to receive statutory sick pay, you must have been working for your employer for a certain time and have taken four days of incapacity from work, which your employer must be aware of. To be eligible, you must also pay national insurance contributions and must not have already received statutory sick pay during your employment.

The price of an income protection policy comes down to a few different factors, such as your age, occupation, health, chosen retirement age and the amount of monthly income that you wish to protect. Because of all of these factors, it’s difficult to give an estimated indication of the terms you might be offered, but it’s known for a person to be able to take out an income protection policy for as little as £1 per day!

Income protection policies are underwritten using your details, so your health and occupation will be taken into account and you will receive terms based on your own situation. A protection adviser will be able to find you the best possible cover, which suits your needs the most. 

Resources

GOV.UK. (n.d.). Statutory Sick Pay (SSP): employer guide. [online] Available at: https://www.gov.uk/employers-sick-pay [Accessed 24 Nov. 2021].