What would happen in the worst-case scenario if you were unable to work? Say you fell ill or got into an accident, and you were unable to go to work for an extended period of time? This is a fear that many have, especially with the pandemic still in our recent memory. Income protection insurance can help here though, providing you with income were the worst to happen and you couldn’t earn money yourself. It means you don’t have to fret about finding yourself in limbo unable to pay your bills or care for your loved ones. This article will look at various sides of income insurance, what it is, why it’s useful, as well as the costs attached.

What is income protection insurance and how does it work?

Income protection insurance is useful as a form of safety net. It provides you with steady income, allowing you to pay your bills and liabilities as normal, even if you are not physically able to work. It means that you are protected, and aren’t simply left out in the cold if something bad happens. Depending on the policy, it will ensure you a continuous income until you are either able to go back to work or are able to retire.

In terms of how it works, it tends to pay out 50% – 70% of your gross salary, depending on the terms of your policy. There is a reason it is only a percentage of your salary and not the full thing. This is because you will be able to get state benefits if you are not able to work in the long-term, as well as the policy payments being tax-free.

Moreover, there will be a certain deferral period, which can range from 4 to 26 weeks. This acts like a waiting period, after which the payments start. The thought for this is that normally, during this waiting period you will be getting sick pay from your employer, or may be able to get statutory sick pay for up to 28 weeks.

When looking into income protection, it is important to read into the small print, to make sure you know which illnesses and situations the insurer covers, as this can vary. Making sure you get as comprehensive as possible a plan is important to ensure it’s worth it, in the event of something happening.

How is it different from other forms of insurance?

The term Income Protection Insurance does sound vague and sounds weirdly similar to a number of other forms of insurance, for instance Payment Protection Insurance (PPI). Understanding the differences is important to understand what you are buying.

  1. Insurance Protection Insurance: As mentioned, this form of insurance protects your earnings. Therefore, if you have an income, it will replace the income if something happens, and you are unable to work and earn that income.
  2. Payment Protection Insurance: This is different. This relates to loan and debt repayments. It is triggered in the same way as income protection insurance; however, this ensures that if you are unable to earn money, your debts, loans and mortgages are still repaid.
  3. Critical Illness Insurance: Critical Illness Insurance has similarities as well. Like with the other two, this is triggered in the event that you are diagnosed with an illness or a disability. This is especially where the condition in question is a long-term one. What Critical illness insurance does, unlike the other two forms, is to provide you with a lump sum, which allows you to pay off medical expenses, mortgages, as well as possibly provide you with some income.

These insurance types are summarised in the below table:

Form of paymentTriggerWhat it pays
Income ProtectionIncomeInability to work due to accident or serious illnessPercentage of your current salary
Payment ProtectionIncomeInability to work due to accident or serious illnessPays off your liabilities
Critical IllnessLump SumSerious illness or disabilityA lump sum for medical bills, day-to-day costs etc.

When do you need income protection insurance?

It’s possible that you don’t even need to get your own plan. Often employers will already provide for it, or have such a comprehensive sick pay plan that it isn’t necessary. Check your employee benefits package to assess whether this is an option for you.

Otherwise, it is a deliberation of whether you are able to manage without a regular income, say through your savings or via your partner. The reason this is a consideration is because, while it is incredibly beneficial if something happens, income protection insurance is expensive, as we will come onto later, and there is no guarantee it will be necessary. As such, if you would be able to survive without it, you need to weigh up whether you wish for the added safety net, or whether it is a gamble on a possibility that hopefully doesn’t even occur.

Note that using your savings can be dangerous. One bonus of income protection insurance is that it can be used as often as needed during the term. With savings, once they’re gone, they’re gone, and they will need to be built back up. This can leave you at risk if something else were to occur.

The time when you will need the insurance is once your sick pay has been used up. Most employers should provide some sort of sick pay scheme for the first few weeks that you are off. This will be your normal salary. After that, you will be moved to a statutory sick pay scheme, which your employer is required to pay for up to 28 weeks. This sits at around £116.75 per week. Depending on how your insurance is set up, you may not be able to start claiming it until after this period is over

How much is income protection insurance?

Income protection can cost as little as £10 per month. This isn’t fixed, however, especially since the price of protection is very much tied to the individual’s situation. As such there are a whole range of factors that can influence the price of the premiums, based on the risk that the individual poses to the insurer. These can include the following factors:

  1. Your Job – if you do a dangerous job, your premiums will be higher. For example, someone who works in a physically safer environment like an office, such as a financial adviser, may be paying less than someone working a more dangerous job, such as a firefighter.
  2. Your Age – the older you are, the greater the risk of illness becomes. Therefore, premiums will increase with age.
  3. Your Health – if you are in good health, this will reduce the price of premiums.
  4. Your Hobbies – dangerous and adventurous hobbies with a greater risk of injury will make your policy more expensive. That being so, if you want cheap premiums, maybe don’t make skydiving your next hobby.
  5. Your Lifestyle – lifestyle choices such as smoking or heavy drinking pose a greater health risk and a greater chance of illness, thus increasing your premiums.
  6. Waiting period – as mentioned before, different strategies have a different waiting time before the insurance policy kicks in, from 4 weeks to around 26. The longer your waiting period is, the more you will save on premiums.
  7. Length of the cover – income protection has a defined length of term. The longer the policy, the more expensive it will be.

One other consideration is the form of income protection you take out. There are three main tiers namely:

  1. Own Occupation Protection – you can’t do your own job
  2. Suited Occupation Protection – you can’t do your own job or any similar job in your field
  3. Any Occupation Protection – you can’t do any job.

‘Own Occupation’ is the most expensive form, however it does offer the best chance of success when making a claim, while ‘Any Occupation’ kicks in when, due to your condition or situation, you are unable to do any job. The latter is the cheapest, however, it may be more difficult to make a successful claim.

Is it possible to cancel my policy?

It is possible to cancel the insurance, but there may be some caveats attached. If you’ve taken out a policy but quickly realise you didn’t want it, or made a mistake, then you should be okay. When you take out a policy, you should be given a 30-day window to cancel it and get a full refund.
Once this window has passed, things start to get more complicated. You will still be able to cancel, however, depending on how the policy is set up and what its terms are, you most likely won’t be able to get all your money back.

Another issue that can come with cancelling is that if in the future you wish to open a new policy this will likely be more expensive than the previous one. This is due to your age, as protection becomes more expensive the older you are, while also accounting for lifestyle and situation changes.

Is income protection insurance actually worth it?

This is a very valid question, especially since only 7% of Brits actually have income protection insurance. While it comes with a lot of positive attributes, it can be expensive, and there is no guarantee that you will ever use it. Whether or not to get it is generally quite an individual question. That being the case, you should assess your situation to decide whether or not taking out an income protection policy would truly be beneficial to you. There are a few factors that are worth considering here.

  1. Do you have sufficient savings or investments that could see you through any difficult periods. If so, it may be worth considering whether it would be better to simply rely on this, rather than paying premiums for an insurance policy.
  2. Would you struggle paying bills if you suddenly were unable to work? Especially if you are living pay check-to-pay check, or don’t tend to have a lot of disposable income that you can use to build up savings. Income protection might be a worthy commitment, giving you a safety net in case you find yourself unable to earn money yourself.
  3. Make sure you check if you are already offered income protection through work. It is often included in the employee benefits package.
  4. If you are self-employed, it may be a good thought, especially since if you are unable to work, you don’t have an employer who can provide you with sick-pay.

Concluding Remarks

To conclude, income protection insurance can act as a safety net in your time of need. It could be the key to stay afloat and keeping all your liabilities in check during a period where you are unable to work. It can also be expensive, however, depending on each individual risk profile. Speaking to a financial adviser is a very good way to be able to ascertain this, with them being able to comprehensively assess your risk profile. This allows them to assess your need for insurance as well as the likely costs thereof.

First Sentinel Wealth does not have the necessary FCA permissions to advise on topics discussed in this blog post, such as life insurance. We therefore do not advise on life insurance.

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