The Truth About Income Protection

Today I have a guest post from Drewberry Insurance – a firm that specialises in Income Protection. This is not your typical guest post and is an excellent introduction into sickness / illness cover. If I am totally honest, this is something I knew very little about prior to reading the below post. I think the whole PPI scandal that has been all over the media recently had painted a very different picture in my head. Enjoy!

Income protection insurance may be a very useful policy to have, yet it is often misunderstood due to there being different types of income cover available offering different policy features and benefits. This hasn’t particularly been helped in recent years by the so-called “Payment protection insurance mis-selling scandal”, with many people assuming that income protection cover is part of the payment protection insurance (PPI) family.

While there are income payment protection policies that are part of the PPI product range, there are also policies that, while they have a similar name, are not. It is no wonder people get confused by the cover! Here we explain how income cover may be valuable to you.

(Please note that this is a general guide and should not be deemed as a substitute for professional advice, as policy terms, benefits and costs can vary on your provider and what may be suitable for you may not be suitable for another individual).

source: goodjoe

source: goodjoe

What is it?

Income protection insurance is designed to generate a regular monthly income for you following a successful claim where accident or sickness has prevented you from continuing your normal occupation for a period of time.

With some policies and providers, you will be able to add on cover for forced unemployment, too.

How long will it pay out for?

This depends on the policy provider, but cover can run:

  • for a short period of time – typically 12 or 24 months
  • until you reach retirement age
  • there are also occasionally policies that run for five years.

Should you be well enough to go back to work during the policy term, then the regular payments will naturally stop.

Do you need it? 

Sadly, none of us are guaranteed to avoid ill-health or have an accident that renders us unable to work, no matter what we do. In the event this does happen, you may be lucky enough to have sickness benefit provided by your employer.

However, eventually these payments will typically reduce and may stop altogether, to be replaced by state benefits. Even the latter may be unlikely to enable you to wholly maintain your mortgage / rent payments plus other day to day costs.

This is where income protection insurance can step in, providing a tax free, regular monthly income until the end of the policy term, or when you get back to work, whichever is the sooner.

This means that while you are recovering, you can focus on getting better, rather than having to worry about your family and bills.

How much can you claim?

This depends on the income provider, but typically you can insure around 50-70% of your gross (pre-tax) income, up to set maximums.

Own occupation or Suitable occupation

One major point about some income protection cover is the ability to select “own occupation” cover. This is a very significant distinction and one that you should look out for when thinking about what cover is most suitable for you. To explain it more:

  • “own occupation” means that if you are unable to continue with your own normal occupation, then you can make a claim
  • with “suitable occupation”, the policy provider may consider that you are fit enough to earn income in a related role, even if it is not your normal occupation – so they will not pay out.

The facts

To put the importance of income cover in to context, the following statistics from the Department for Work and Pensions (DWP) may help:

  • more than 370,000 people claimed Employment and Support Allowance (ESA) for incapacity in August 2009
  • the average claim for incapacity benefit stands at nearly three years.

At the time of writing (January 2013), the maximum amount receivable under ESA is £99.15 per week (after 14 weeks of incapacity)* – an amount which is unlikely to help you meet all your commitments in the event of incapacity.

Finding out more

There is lots of information available on the internet (such as this short guide) that will help you make an educated choice when looking for income protection cover. Making sure, however, that you get the most appropriate solution for you, is very important. That is why using the services of a specialist income cover provider, where you can discuss your needs – and your budget for such cover – may make sense. Using their expertise in what can be an often complicated area of insurance, means you’ll have peace of mind that you have suitable and cost effective protection cover.

 

*https://www.gov.uk/employment-support-allowance/what-youll-get

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Comments

  1. £99.15 pounds per week isn’t much, i’m not sure many people could survive on that.
    Glen @ Monster Piggy Bank recently posted..Sell Structured Settlement Payments – Lump Sum vs AnnuityMy Profile

  2. I’m self-employed and don’t get sick pay so I didn’t really have a choice about getting this cover. These plans have been around for years and are completely different to PPI so I wouldn’t be put off by the press. At the end of the day insurers are insurers but at least most of the income protection ones state their payout rate so you know which ones are good.

    • Hey Paul. Good to hear from someone with experience with this type of policy. Sounds to me like these are pretty much essential for the self-employed!

  3. great advice

  4. Great post–I really didn’t know much about this type of insurance before reading. Such an important point about “own occupation!”
    The Happy Homeowner recently posted..January 2013 GoalsMy Profile

    • Absolutely… I must admit I was the same as you before writing about it. The ‘own occupation’ term could have been a massive oversight had I not learned what it was. I wonder how many people have fallen into that trap!

  5. I think we’ll definitely need this when we buy a house/have kids. Own vs suitable occupation is intriguing too. Thanks for enlightening us a little :)
    eemusings recently posted..Fitting travel into your life planMy Profile

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