INCOME PROTECTION INSURANCE - Technical Stuff
What exactly is Income Protection?
A typical policy you might take out yourself:
Pays you a tax free benefit, usually up to 50-60% of your income.Pays if you cannot work due to illness or disability.
Pays if you are unable to do your own occupation (this is the most generous definition; other definitions are used for some higher risk occupations, where otherwise the cost of insurance might simply be too high).
Starts paying when the deferred or waiting period ends. This can be anything from one day or one month, up to 12 months or more. 3-6 months is a typical choice. The longer the deferred period, the lower the premium you pay. Choose a deferred period that matches how long your employer will pay or the period you’re happy to fund from your savings.
Some insurers also include cover against being made unemployed. This benefit is usually payable for up to a year.
Benefit continues until one of the following happens:
- you return to work
- you retire
- you die
- the policy stops. Policies can pay benefit up until you retire or for as little as 1-5 years (these budget plans are cheaper because the cover is less)
Premiums will either be fixed (called ‘guaranteed rates’) or will go up each year or periodically.
Most insurers don’t just pay you a monetary benefit. They help too to get you back to work as soon as possible. Medical opinion is now that in the vast majority of situations, being at work is better than not, so insurers use experts and techniques such as rehabilitation to help you get fit again as quickly as possible and to get you back to work in the best way for you.The policy carries on once you return to work so you may claim again in future if you need to. We only call policies Income Protection if they can continue after you’ve made a claim. If the policy can be stopped by the insurer or the cost might then go up, we don’t think they should be called Income Protection (so do check – and click on FAQs for more).
If you stop paying premiums the policy will usually stop (insurers call this a lapse) with no return of money. Some policies (usually called Holloway policies) include a savings element, which is usually not guaranteed but builds up a fund that you get when you retire).
An insurer cannot stop the policy if you make a claim (unless there is fraud) or charge you a higher premium if you claim. Such policies are called ‘permanent’ policies and should not be confused with short term policies such as payment protection insurance or PPI, which have no such guarantee.
You can find out more about Income Protection from the ABI (Association of British
Insurers) website.
How much does Income Protection cost?
It depends on how old you are, what job you do, your health and the benefits package you choose. The average cost of Income Protection insurance in 2010 was less than £450 a year (source: Protection Review 2011, based on ABI data), but you could pay more or less than that depending on your personal circumstances and how much and what type of cover you buy. Whatever premium you are quoted, look at it as a percentage of your gross (total) income, and you’ll be surprised how little it costs.
In some cases, after your application is assessed (insurers call this ‘underwriting’ and it can take from a few minutes to a few weeks – largely depending on whether a doctor’s report or medical examination is required) you may be asked to pay a higher premium or the benefits of your policy may be changed in some way. That will be because the insurer has assessed the risk as being higher. No one likes to pay more – but it does also mean that you are probably more likely to claim, so the value for money should be roughly the same.
Top tip 1: If you can build up enough savings or investments, you may be able to afford to choose a longer deferred period for your Income Protection plan. Longer deferred periods mean cheaper premiums, which means you can build your savings up even more.
Top tip 2: Making sure you get the right cover and the best value can be complex. It usually pays to seek advice from a financial adviser or other specialist.
INCOME PROTECTION FROM YOUR EMPLOYER - click here