The Risks of Income Protection

Income protection is a valuable policy that provides a monthly income replacement if you are incapacitated and unable to work. Income protection can allow you to maintain your standard of living if you are unable to work due to long-term disability or injury.

Whilst we feel that income protection is an insurance that many people should consider there are a few niggles that need to be addressed when considering applying for the cover. This article aims to dispel a few points of confusion that surround income protection cover.

1. I have income protection and are unable to work, my policy will payout

Hopefully yes. If you are unable to work for a set period of time due to a long-term disability or injury then your policy is likely to pay a benefit claim. This will be dependant upon the reason that you are ill and the deferment period on your policy. It is likely that the insurer will contact your GP to confirm the reasons as to why you are unable to work and you may be required to provide periodic medical certificates to maintain your claim.

Note! An income protection policy will not payout if you are made redundant.

2. I have been unable to work for a week, my policy will payout soon

This depends on the terms of your individual policy. An income protection policy will come with a deferment period which is the time that you must wait from the first day of being unable to work, to the day that a benefit claim can be paid. This may be 1 day, 1 week, 4 weeks, 8 weeks, 13 weeks, 26 weeks or 52 weeks.

The deferment period should ideally match any sick pay arrangements that you have with your employer. In some instances your income protection policy will not pay in addition to employer sick pay. So if you get six months of sick pay from your employer, there may be no point having an income protection policy that pays a benefit on a deferment period less than 26 weeks.

Note! The longer the policy deferment period the cheaper your policy will be, but you must consider how long you can live comfortably before your regular income is replaced.

3. I earn a salary of £24,000 so my benefit will be the same

This is not true. In general income protection policies will provide you with cover for between 50-65% of your gross income. This would mean that in this instance the insured would see a maximum annual tax-free benefit of £15,600. In terms of regular income the insured would go from a monthly take home salary of approximately £1,617 to a Income Protection benefit of £1,300. In most circumstances, if you have opted for personal income protection, you will not pay national insurance or income tax on your monthly payout.

It is also very important that you consider if any of your income is paid as part of a bonus scheme. Not many, but some insurers may discount bonus income from your maximum benefit and you need to ensure that the insurer is fully aware of your pay structure. At the time that you place a claim it is likely that the insurer will want to see evidence of at least your last 12 months income.

Note! It is important that you consider the difference between your net pay and maximum policy benefit when considering your finances.

4. My occupation and salary have changed but this doesnt matter, my policy is already in place

False. It is important that you inform the insurer of any changes to your occupation to ensure that you are still eligible for the policy. Notifiable changes on some income protection policies include but are not limited to changes in occupational role, duties, geographical location (outside designated countries) and salary. Whilst these updates are not essential for all income protection policies, it is probably best to err on the side of caution and update the insurer of any changes that take place. You should also inform the insurer if you change status between employed, self-employed and unemployed.

A change in salary could have a significant impact on your policy, whether it is a reduction or an increase. A reduction in salary could mean that you become over-insured. This means that you are paying for a policy with a benefit higher than you are now eligible for and paying a higher premium to match this amount. If your salary is reduced you may wish to lower your income protection benefit to the maximum amount possible which will in turn lower your policy premiums. An increase in salary may mean that you increase your regular outgoings for a new standard of living and would then be potentially under-insured for your new expenditures.

Note! It is your responsibility as the policyholder to inform the insurer of any changes in your working circumstances.

5. I have family income benefit, I do not need income protection as well

Care should be taken when comparing different types of insurance products. Family income benefit pays a regular monthly income to your family if you die (or develop a critical illness if included in the plan) within the policy terms. Your family then receives a set monthly income replacement for a set number of years, often until your anticipated retirement age. Income protection provides a monthly income replacement if you are incapable of working due to long-term disability or injury. On the surface both policies appear to provide the same kind of benefit, but they do in fact provide protection for completely different situations. Rather than competing with each other, the policy types are complimentary.

It is also worth nothing that unemployment policies are also complementary to income protection cover. Income protection pays out if you are unable to work due to ill health, unemployment cover will pay out if you are made involuntarily redundant. Ultimately, you could speak to an insurance broker and they may identify a need for you to have life insurance, critical illness cover, income protection, private medical insurance and unemployment cover. The important thing is that whilst you could be recommended these options, you do not have to get them all, it is up to you to take out the insurances that you feel are appropriate for you.

Note! The only potentially comparative cover to income protection is an accident and sickness policy. But, there are huge differences between the policy types and you need to make sure that you compare eligibility criteria, maximum monthly claims benefit, premium guarantees and the length of time that a successful claim would pay out for.

Why income protection?

It is suggested that you are five times more likely to become seriously ill than you are to die unexpectedly at an early age. With this in mind income protection should be of quite a high priority to many individuals but is often considered to be the “forgotten insurance”*.

If you would like to discuss whether Income Protection is a part of your insurance needs please feel free to speak with one of our industry-trained advisers on 0800 567 7450 for a no obligation quotation. Alternatively please use our online quotation form to see how much Income Protection insurance may be available to you.

*Chartered Insurance Institute, Diploma in Regulated Financial Planning, July 2015 Study Text, Financial Protection R05