Unlocking Financial Security: What is Income Protection Insurance?

Income protection insurance provides a regular income when you’re unable to work due to sickness or disability.

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What is Income Protection Insurance?

It lasts until you resume paid work or retire, and it’s also referred to as permanent health insurance.

The income you can claim won’t match your pre-illness earnings exactly.

Typically, you’ll receive about half to two-thirds of your pre-tax earnings from your regular job.

This accounts for deductions for state benefits and the tax-free nature of the insurance income.

You can’t immediately claim income protection payments if you fall ill or become disabled.

Usually, there’s a minimum waiting period of four weeks, but payments may commence up to two years after you stop working.

This delay is because you might have other sources of income during this period, such as sick pay from your employer or statutory sick pay for up to 28 weeks.

An infographic illustration of Income Protection Insurance

Other options like critical illness insurance exist for coverage against specific illnesses.

It’s advisable to compare income protection insurance with other illness insurance types before making a purchase decision.

How does Income Protection Insurance Operate?

Income protection insurance:

– Issues regular payments replacing a portion of your income in case you’re unable to work due to illness or an accident.
– Continues payout until you can resume work, retire, pass away, or reach the policy term’s end – whichever occurs first.
– Typically disburses between 50% and 65% of your income if work becomes impossible.
– Encompasses most illnesses leading to work incapacity, either short or long term, depending on policy type and its incapacity definition.
– Allows multiple claims throughout the policy duration, catering to your needs.
– Involves a pre-agreed waiting (‘deferred’) period before payments commence, commonly set at 4, 13, 26 weeks, or a year. Longer waiting periods result in lower monthly premiums.

It differs from critical illness insurance, which provides a one-time lump sum for specific serious illnesses.

When should you consider income protection insurance?

If you find yourself unable to work due to illness or an accident, the expectation that your employer will continue providing income might be a natural assumption.

However, in reality, most employees are typically transitioned to Statutory Sick Pay within six months.

Only a small number of employers extend support to their staff for more than a year during sick leave. Verify the assistance your employer offers if you are off work due to illness.

Depending on your savings, the loss of income can quickly render you unable to cover essential household expenses, including mortgage or rent and utilities.

This situation can be especially challenging for self-employed individuals who lack sick pay as a fallback.

Considerations before obtaining income protection insurance:

What to do Before Acquiring an Income Protection Insurance

1. Necessity of Income Protection
– Confirm whether you already receive income protection through your workplace, as some employers provide this as a benefit. Refer to your employment contract, handbook, or personnel department for such information.

– Check if you have alternative illness coverage bundled with another insurance policy or your mortgage, specifically for serious illnesses.

– Assess the viability of using existing savings as an alternative to insurance. However, weigh the decision carefully, considering the potential inadequacy of savings for prolonged periods of ill-health and the risk of unforeseen emergencies depleting your savings, leaving you without coverage for illness.

2. Suitability of Illness Insurance Type
– Explore various types of illness insurance to identify the one that aligns best with your needs.

– If concerned about the cost of income protection insurance, consider opting for critical illness insurance, which might be a more cost-effective alternative. Keep in mind that critical illness insurance covers a limited range of illnesses for a shorter duration compared to income protection insurance.

3. Seek Professional Advice
– If uncertain about the most suitable illness insurance type, seek assistance from an independent financial adviser. They can provide guidance tailored to your specific circumstances and preferences.

How Long You Need to Wait for the Policy to Pay Out

Typically, you must endure a minimum waiting period of four weeks after ceasing work for payments to commence, known as the waiting period. Some waiting periods extend up to two years.

Opting for a longer waiting period before making a claim might result in lower insurance premiums.

The Amount You’ll Receive when Making a Claim

It’s crucial to determine the exact payout when making a claim.

The payment amount may be influenced by other sources of income, like state benefits or payments from additional insurance policies.

Additionally, inquire whether the payments will increase annually to align with the cost of living.

How Insurers Assess Your Job

Insurers evaluate the risk associated with your occupation when deciding coverage and pricing.

Since different insurers may assess the same job differently, identifying the category your job falls into is essential for potentially securing a more economical premium elsewhere.

Information to provide to your insurer before obtaining income protection insurance:

You must furnish your insurer with comprehensive details about your and your family’s medical history.

Omitting any information may lead to a refusal of payout when making a claim.

If you have a pre-existing medical condition, find an insurer willing to cover it, even if it involves higher premiums.

Disclose any risky hobbies or lifestyle choices, such as smoking or heavy drinking, as failure to do so might result in a denied claim.

Determining the Level of Cover Needed for Income Protection Insurance

To calculate the necessary coverage for income protection insurance:

1. Begin with your current take-home pay.
2. Subtract the amount you would receive in state benefits.
3. Deduct work-related costs like travel, food, and clothing.
4. Add any additional expenses anticipated if you become ill or disabled, such as increased heating costs or the expense of medical equipment.


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