This blog will look at What is Income Protection? The main features and benefits of an income protection plan and it will also look at whether you need income protection.
What is income protection?
Income protection (sometimes called Permanent Health Insurance PHI) is an insurance plan which pays out if you are unable to work due to ill health or injury.
How much does it pay?
The plan will pay out a percentage of your earnings. It will not pay the full amount you would receive for work:
- To allow for tax and
- To compel you to return to work
The maximum amount an income protection policy will pay is in the region of 60% of your earnings. If you are a company director, some providers will include salary and dividends in your earnings.
When you take out the policy, you can set it up so that the cover is either level or increases in line with inflation or at a fixed rate. If it’s increases, the premiums will also increase at each annual review.
Cover can either be for “any occupation” or your “own occupation”. The former will pay out if you cannot perform a pre-determined list of tasks i.e. if you cannot do any kind of work, the latter will pay out if you cannot perform your own occupation. An example of this would be someone who does a physical job such as a vet, if they were unable to do their own job but could do another job, Own Occupation would pay out whereas any occupation cover would not.
When does it pay?
Income protection plans have a deferral period. This is a period of time from the date you no longer able to work until the date the replacement income will commence. This period could be 0 – 24 months. The longer the deferral period, the less the plan will cost.
The policy will pay if you are unable to work for any reason from having a bad back to stress. Certain parameters may need to be met and medical practitioner opinions may be sought in order for income to commence.
How long is it paid for?
Plans will either pay out to the end of the policy term – usually normal retirement age or for a specified period of time e.g. 1 or 2 years.
You have to maintain premiums throughout a claim being made, therefore this could be a plan where having Waiver of Premium included could be of benefit. If the premiums lapse, cover will no longer be valid.
How much does it cost?
The cost of Income protection will depend upon a number of factors including:
- Your age
- Your earnings
- The term of the cover
- The deferral period
- The payment term
If we take a 30 year old male earning £35,000 cover to state pension age (68) with a deferral period of 6 months would cost £25.50 per month. This would provide cover of £21,000 per annum to age 68 or until he returned to work. (The Exchange, December 2017).
Do I need income protection?
In answering this, you should consider the following questions:
What do you think your biggest asset is? Many people think it is their house, but it is in actual fact your income. If you were unable to work for a number of years, the lost income would soon be much more than your house is worth and that’s if you were able to keep up the mortgage payments.
Could you survive on £89.35 per week? This is the amount Statutory Sick Pay (SSP) pays. It is paid for up to 28 weeks. Not everyone will qualify for SSP – for example if you are self-employed, you would not qualify.
How long would your savings last? Many people think they could reply on their savings if they were unable to work. If you are earning £35,000 per annum and you have savings of £20,000, how long do you think this would last? And what would you do if your savings ran out and you were still unable to return to work?
Does your employer pay your income if you are unable to work? If so, how long for? Some employers will pay full or a percentage of your income for a period of time if you are unable to work. It is unlikely however, that they will pay you up until state pension age. Even if your employer does provide income over and above SSP, you may want to consider taking out a personal Income Protection plan which would have a deferral period that ties in with when your employer will no longer pay you.
Many people think that they will never been too ill to work for a long period of time however, it does happen.
If you would like to look into taking out Income Protection contact me for a no obligation initial complimentary meeting.