Income Protection Insurance

Income protection insurance serves as a safeguard against financial hardship during periods of sickness or injury by providing income that’s free of tax. 

Typically, it complements life insurance, offering reassurance and financial stability. This type of insurance can ease the burden of essential expenses like mortgage, bills and rent, ensuring peace of mind until restarting work or retirement.

By securing an income protection policy, you gain assurance knowing you have an additional income source to cover bills during injury or sickness-related absences from work. 

Policy coverage extends until retirement or your return to work, tailored to your chosen policy terms.

In the UK, individuals can receive government-funded statutory sick pay for up to 28 weeks when they can’t work on account of illness. However, this amount, currently £96.35 per week, may not suffice, underscoring the importance of personal insurance coverage.

In the following, we are going to delve deeper into the what, why, when and how of income protection insurance.

How Does Income Protection Insurance Works?

Income protection insurance offers regular payments to substitute a portion of your income if you aren’t working because of illness or an accident. 

These payments continue until you can resume work, reach retirement, pass away, or the policy term ends – whichever happens first.

Typically, it replaces between 50% and 65% of your income when you can’t work because of various illnesses, covering both short and long-term incapacities based on policy terms and definitions.

This insurance allows multiple claims throughout the policy’s duration and usually entails a pre-agreed waiting period, known as a ‘deferred’ period before payments commence.

Common waiting periods include 4, 13, 26 weeks, or a year, with longer waiting periods correlating to lower monthly premiums.

It’s essential to note that income protection insurance is separate from critical illness insurance, which provides a lump sum payout upon diagnosis of specific serious illnesses.

Who Should Get Income Protection Insurance?

You may find it beneficial to explore income protection insurance options if you fall into any of the following categories: self-employment, limited sickness benefits from your employer, modest savings, dependents relying on your income, or being single and solely responsible for household expenses.

Who Shouldn’t Worry About Getting Income Protection Insurance?

Under specific conditions, you may not see the need for income protection insurance. 

If your sick pay proves ample, such as through a benefits package extending income for a minimum of 12 months, or if government benefits adequately cover your expenses, you might find income protection unnecessary. 

Similarly, if you possess substantial savings to rely on, it’s important to consider the longevity of these savings. 

Additionally, if early retirement is a viable alternative, or if your partner or family can provide support, especially if your partner’s income can cover both of your needs.

Index Linked Income Protection

This essentially means that the potential payout grows annually to accommodate rising living costs and increasing salaries over time.

Many providers adjust the potential payout in alignment with the Retail Price Index (RPI) inflation measure or by a fixed percentage annually. According to data from insurer Royal London, the increment typically ranges between 1% and 5%.

In contrast, a non-index-linked policy guarantees a fixed payout amount per year, such as £12,000, which remains constant throughout the policy term.

Initially, index-linked policies have higher costs compared to non-indexed ones, and these costs escalate annually.

Stepped Benefit Income Protection

A stepped-benefit policy considers whether your employer already provides sickness cover. For instance, your company might cover your salary for three months if you’re unable to work due to injury or illness.

In such cases, a “stepped” insurance policy comes into play: it provides lower payouts while you’re still receiving a salary from your employer and increases payments when your company’s contributions decrease or cease.

Kinds Of Income Protection Insurance

Income protection insurance can be broadly categorised into two types:

• Short-term policies may extend to around 12-18 months, although some insurers offer coverage for up to five years.
• Long-term policies providing coverage until retirement.

These may further be divided into the following types:

1. Permanent health insurance (PHI)

This term refers to income protection insurance, covering all types of long-term income protection.

2. Accident and sickness cover

This policy offers a replacement monthly income if you’re unable to work due to injury or health reasons, available as both long-term and short-term options.

3. Unemployment cover

This insurance safeguards against potential redundancy, providing income during periods of unemployment. It’s typically a short-term policy, lasting up to 12 months.

4. Accident, sickness, and unemployment cover

Combining the aforementioned protections, this policy addresses various reasons for work absence. Usually short-term, it pays out for up to two years.

Here, it’s important to note that Permanent Health Insurance (PHI) and Accident, Sickness, and Unemployment Cover (ASU) differ significantly in their coverage and claims processes.

PHI primarily safeguards individuals against long-term sickness or injury, ensuring financial protection until retirement. 

On the other hand, ASU policies are typically short-term solutions, extending up to two years, and encompass provisions for redundancy.

In terms of claims, the flexibility of PHI policies allows for multiple legitimate claims as necessary, providing ongoing coverage and support. 

Conversely, ASU policies limit claim opportunities to a single instance. Upon making a claim, the policy terminates, necessitating the acquisition of a new policy for continued coverage.

Difference Between Income Protection Insurance and PPI

Payment Protection Insurance (PPI) usually focuses on covering specific loan repayments, such as those for a mortgage. 

In contrast, income protection serves a broader purpose, extending to cover various living expenses beyond loan repayments.

Although the payout from an income protection policy can indeed be allocated towards mortgage repayments, it also caters to essential needs like food, bills, and other household expenses.

Furthermore, PPI policies typically offer short-term coverage, typically up to 24 months, while income protection policies can provide financial support for significantly longer durations.

Frequently Asked Questions (FAQs)

1. How has the COVID-19 pandemic impacted income protection policies?

In response to the pandemic, insurers generally honour payouts to existing policyholders who suffer incapacitation or severe illness due to COVID-19, rendering them incapable of working. 

However, coverage for circumstances like self-isolation or income reduction while on furlough is unlikely, but it’s advisable to review the policy’s specific terms and conditions.

2. Is it possible to hold multiple income protection policies?

In theory, yes, although having more than one policy may not be advantageous, as the total payout cannot exceed a certain percentage of your gross salary. 

For instance, if you possess two policies, each offering to cover 50% of your salary, you cannot combine them to achieve full coverage.

In the event of a claim, insurers will inquire about any continuing income, including payouts from other insurance policies, and adjust the coverage level accordingly.

3. Does income protection insurance provide payouts in case of death?

No, income protection insurance does not offer payouts in the event of death. If you wish for your dependents to receive financial assistance upon your demise, it is advisable to explore life insurance options. However, it is possible to hold both life insurance and income protection policies concurrently.