You never know what life may throw your way, so it’s important to have a backup plan for those unexpected times.
What happens if you sustain a serious illness or find yourself too injured to work? In this scenario, you’ll still need to meet your financial commitments. Income protection insurance offers a safety net for individuals who want to financially protect themselves from hardship with the promise of a steady income.
What is income protection insurance?
So, what is income protection cover?
Briefly put, this type of policy pays out a percentage of your regular income when you are unable to work due to sickness or disability. These payouts will continue until you can return to work, or you reach retirement, whichever occurs first.
How does income protection insurance work?
Income protection insurance will provide you with a tax-free percentage of your earnings (typically between 50% and 70%). These regular payments are designed to help you fulfil financial obligations, such as your mortgage, until you can work again.
You can claim your payout as many times as you need throughout the duration of the policy. However, these will cease once you return to work or reach retirement.
It’s worth noting that you won’t be able to make your insurance claim right away. More often than not, you’ll need to wait a minimum of four weeks, also known as a deferred period.
The predetermined waiting period can range from 4, 13, 26, and even 52 weeks. The longer you wait for your payout, the lower the cost of your monthly premiums.
Some individuals may not need the money right away, as they may receive sick pay from an employer or be eligible for Statutory Sick Pay.
What does income protection cover?
Depending on the type of policy and its characterisation of the term incapacity, you’ll be covered across a range of injuries and illnesses.
Income protection insurance can cover you on a short or long term basis, or both. However, you won’t receive any pay outs if you are made redundant.
Do I need income protection?
You may not require income protection on a short-term basis if your employer offers a sick pay benefit.
As of June 2022, you may receive up to £99.35 per week from Statutory Sick Pay if you’re deemed too ill to work. However, this will only be provided for a maximum of 28 weeks and, depending on your lifestyle, this may not be enough to get by.
If you happen to be incapacitated for a longer period of time, you may require additional support to cover financial commitments, like rent or mortgage payments.
Income protection benefits are especially useful for self-employed individuals that cannot rely on an employer to support them through difficult times. If you can rely on a family member or partner to support you, you may not require income protection insurance.
Similarly, if you have enough savings to sustain your lifestyle, you may find an income protection policy unnecessary. Nevertheless, using your savings could leave you in a tough financial spot if you were to encounter another emergency in the future.
For a better understanding of whether you need income protection insurance or not, it’s best to seek guidance from a financial professional.
How much is income protection insurance?
The cost of income protection insurance ultimately depends on several factors, including the type of policy you choose as well as your personal circumstances.
Factors that may affect your income protection insurance premiums include:
- Your age
- Your job
- Your weight
- Your current health and medical family history
- Whether you are a smoker
- The percentage of income you would like to protect
- The length of your deferral period
- The range of illnesses or injuries your policy covers
Similarly, the price of your premiums will also depend on whether you opt for a standard premium, which the insurance provider increases gradually, or a guaranteed premium, which remains fixed throughout the entirety of your policy plan.
What are the benefits of income protection?
Although there are many income protection benefits, the most important one is the security of a stable income. With this type of insurance plan, you can create a financial safety net in the event of an injury or illness.
Not only can this insurance bring great peace of mind to individuals with copious financial responsibilities, but it can also boost your resilience if another emergency were to occur in the future.
The difference between income protection and critical illness cover
Critical illness insurance provides you with a lump sum of money in the event that you are diagnosed with severe illness.
The range of illnesses this covers varies according to the provider. However, it typically encompasses life-threatening or long-term illnesses, such as Parkinson’s disease, cancer, or medical emergencies like a stroke.
These types of emergencies tend to incur high medical costs and drastic lifestyle changes. Therefore, a critical illnesses insurance policy can help pay off routine bills and expenses.
However, you are free to spend the money in whichever way you would like. The main difference between income protection and critical illness cover is that the latter provides a steady income across a wider range of scenarios.
The difference between income protection and mortgage protection
Mortgage payment protection insurance (MPPI) can help cover outstanding payments and avoid foreclosure when you can no longer work. Terms and conditions will vary, but most policies will pay out if you are out of work due to an illness, injury, or redundancy.
Income protection insurance is a broader safety net than mortgage protection insurance because it provides you with a portion of your monthly salary. You receive a monthly salary and use this to defray other crucial expenses rather than simply covering mortgage payments.
Is income protection the same as payment protection insurance (PPI)?
No, PPI offers protection for specific debts, such as a loan or mortgage whereas income protection pays out a percentage of your salary if you are unfit to work due to injury or illness.
Please note that PPI has historically been used for credit card debts and has recently come under scrutiny because of mis-selling. We would not recommend relying on PPI to protect you.
Can you have two income protection insurance policies?
Theoretically speaking, yes. You could purchase as many income protection policies as you would like. However, you won’t be able to claim from multiple providers, making the purchase of multiple policies ineffective.
Does income protection cover redundancy?
No, income protection insurance will not pay out if you are made redundant.
Is income protection a taxable benefit?
Yes, if you pay for your premiums yourself, any payouts received will be tax-free.
Can you claim income protection on your tax return?
Yes, you can usually claim tax deductions on the cost of your premiums.
Income protection insurance offers individuals a significant amount of security at a time when they need it the most. The last thing you want to worry about during your recovery is where your next paycheck is coming from.
Thanks to this insurance policy you can handle your expenses and focus on what’s truly important - your health.
If you still find yourself asking, do I need income protection insurance, don’t hesitate to contact us today. Efficient Portfolio works with a wealth of professionals who will be able to guide you further.