There can often be confusion around income protection and life insurance policies, what the differences are, what type of policy should be taken out and what will it cover? A brief look at the two types of insurance below should provide an answer to these questions…
Income Protection Insurance
Income Protection Insurance policies are designed to protect mortgage payments, household bills and a number of other outgoings by providing an income if you find yourself in a position where you can’t work due to disability or sickness. This type of insurance is necessary for the majority of people because according to recent research, only 12% of employers pay their staff if they’re off sick for more than a year. So if you’re one of the unlucky 88% or are self-employed, then income protection can provide for you and your family in case of injury or illness.
It is possible to take out either long-term protection (pays out until you return to work or retire) or short-term (usually 1-5 years), whilst if you are off work due to illness or injury, then payouts are usually between 50% and 70% of your take-home pay, but are only payable after employee sick pay has ceased.
Types of long-term policies are:
- Age related – The premium increases annually by a pre-agreed amount.
- Reviewable – The price usually increases after a set number of years.
- Guaranteed – Premiums remain the same throughout the term of the policy
Size of premiums will be determined by:
- Salary – the amount of salary you’re insuring against.
- Job risk – Occupations tend to fall into one of four categories (four being the highest risk). For example, clerical workers tend to fall into category one, category two incorporates shop assistants, plumbers fall into category three, whilst construction workers will find themselves in the highest risk category.
- Smoker/non smoker – If you’re a smoker your premium is likely to be higher.
- Health – pre-existing conditions will either be excluded or incur a higher premium.
- Deferral period – Agreeing to increase the period between when you claim and when you receive payments will reduce your premium.
- Hobbies – participation in certain dangerous pastimes can increase your premiums.
When inquiring about income protection insurance, it is important to be honest about your medical history, hobbies, lifestyle choices and pre-existing conditions as failure to disclose information that may attribute to injury or illness may void your policy.
Life Insurance is a way to protect your loved ones financially in the event of your death or diagnosis of terminal illness. If you’re thinking about taking out life insurance you need to look into what types of cover are on offer and what level is right for you dependant on your situation.
There are a variety of levels and policy options available, from protection in the event of incapacity, pay out upon death, and cover for funeral costs and mortgage repayments. Matching your policy to your personal circumstance is important to get right:
- Level Term Life Insurance – This is the most common type of life insurance. The amount of cover remains level throughout the policy and the insurer will pay-out the amount you are covered for in the event of your death.
- Level Term Life and Critical Illness Insurance – The insurer will pay out the amount you are covered for in the event of your death or diagnosis of a terminal illness.
- Mortgage Protection Insurance – The amount of your cover reduces throughout the policy in relation to the amount of repayments left on your mortgage. In the event of your death the insurer will pay out the calculated amount of cover at that time.
- Mortgage Protection and Critical Illness Insurance – The amount of cover reduces in line with your mortgage repayments. In the event of your death or diagnoses of a terminal illness the insurer will pay out the calculated amount of cover at that time.
The size of premiums will typically be dependent on the same criteria as income protection insurance (see above), and again honesty is important in regards to medical history, hobbies, lifestyle choices and pre-existing conditions to avoid voiding your policy.
So now you know the differences and types of cover available, it should make it easier to decide which might be most appropriate for you. If you’re unsure what type of income protection or life insurance policy is right for you, remember it’s important to take into consideration your earnings, job and family situation. Endsleigh offer advice and support to help you find the right insurance policy based on your personal circumstances.