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If you lost your income due to an illness or an injury, how would you manage to keep on top of your essential outgoings? How would you cover the costs of general bills, rent payments, and instalments on your loan or mortgage? This is where income protection comes in.
Many of us don’t have a never-ending pot of savings we can rely on should we find ourselves in such a circumstance. That’s why signing up for income protection is the smart choice. Income protection is a long-term insurance policy that makes sure you get a regular income until you retire or are able to return to work. Income protection insurance is also known as permanent health insurance.
Income Protection does not replace that exact amount of income you were on before you were unable to work. Income protection provides a replacement income of up to 70% of your current salary or your net profit if you are self-employed. You can expect to receive about half to two-thirds of your earnings before tax from your normal job. This is because some money will be taken off for the state benefits you can claim, and also the income you get from the policy is tax-free.
The benefit is payable after a waiting period of anything from Day One up to a period of 12 months depending on your occupation and the benefits provided by your employer.
Insurers provide cover periods from two years up to retirement age of 70 years on an own, suited, or any occupation basis with either a level or index-linked benefit selected.
Premiums can depend on the nature of your occupation but some providers don’t differentiate and provide a similar premium basis irrespective of what you do for a living.
We often assume that our employers would cover us during a time of illness or recovery from an injury, ensuring our income remains the same.
However, the harsh reality more often than not is employees are usually moved onto statutory sickness within six months. Very few employers will support their staff members for more than a year if they’re off sick from work for a prolonged period. It’s important to check with your employer what they would provide for you in the instance you were unable to attend work due to illness.
Depending on the level of savings you may have, the loss of an income can soon leave you unable to pay essential household bills, keep up with payments of loans, mortgages, and rent. And any other costs that may arise can soon add up to only being things that cause additional stress.
If you are self-employed, then there tend to be no statutory sick pay or state benefits/lump sums to fall back on.
What do you need to know before you take out income protection cover?
It’s always a wise choice to check out the terms and conditions of any insurance policy before you sign up to make sure it meets all of your needs and get the best level of cover possible for you. It’s good to have a strong understanding of what you can claim for when you can make your claim, and how much financial support you will receive.
There are rules which say the policy documents must be written in easy-to-read plain English, so you can understand what you’re signing up to. Even so, our financial advisers are always on hand to talk things through with you and discuss your policies.
Even the best authorised and regulated insurance policies don’t always cover every type of illness. You may also not receive coverage for certain illnesses you or a member of your family has had previously. These are known as pre-existing medical conditions.
Your medical history and your family medical history will be reviewed by insurers to ensure that you are provided with a policy that covers your needs efficiently. If your family medical history means that there will be conditions attached to you taking out the policy, your insurer should explain these to you before you sign up for the policy.
You also need to know if you will still be covered if you can do other kinds of work than your own. Some policies say you can’t make a claim if you stop being able to do your own job but can do other types of work. You should check the insurance policy to see if it says this. Also, check out our private medical insurance page!
It’s worth noting there are a few factors that affect the cost of taking out income protection insurance;
Your age – the older you are when you take out the policy, the more you are likely to pay, as your risk of getting ill increases
Your health – if you’re in good health, you will pay less to insure yourself
Your job – if you do a risky job, you will pay more to cover
Hobbies and lifestyle – if you take part in dangerous hobbies or you smoke or drink heavily, you will pay more for cover
The waiting period – the longer you can wait before you make a claim, the cheaper your premiums will be
Whether you might be prepared to do other kinds of work than your own if you get ill – it usually costs less to take out income protection insurance if you say you will only make a claim if you are unable to do any work at all, rather than just your own job.