If you were to suddenly become too ill to work, could you and your family survive with the loss of your income?

This article will explain how Income Protection Insurance can protect your family finances in times of illness.

What is Income Protection Insurance?

This kind of cover is designed to protect you and your family in the event of you being unable to work due to an illness.

There are two different types of income protection cover available:

Long-term Income Protection (IP) – This form of income protection is designed to cover you in the long term, be that until you return to work, retire, or die. If you are interested in long-term cover, you could also look at Critical Illness Insurance as an alternative insurance product for cover in times of life-threatening illnesses.

Short Term Income Protection (STIP) – This is designed to cover you over a shorter period. To help you cover your income whilst you recover from illness and get back to work.

Please Note: Income protection insurance will not cover cases where the policyholder has been made redundant.

This form of insurance is very different from Payment Protection Insurance (PPI), as these are designed to cover your income, not to protect any large debts you have, exclusively. With a payout, the money you receive will be tax-free and you can choose how much you want to pay towards premiums. This should help you secure a certain percentage of your normal earnings in times of illness. This could be from 50-70% of your wages, depending on the level of cover you choose.

Income protection insurance can also be known as ‘Loss of Earnings Insurance’, ‘wage protection insurance’, or ‘sick pay insurance’. However, please note, Accident, Sickness and Unemployment insurance may also colloquially be referred to by these alternative terms.

Do I need Income Protection Insurance?

If you are in work, you may already benefit from a form of employee income protection insurance. For most, the cover will be short-term, depending on your employer’s benefits package.

But if you were looking to fund your own insurance, your occupation will be classed in one of four ways. This categorisation can help you determine the amount of cover you could need. The classifications are as follows;

• Class One – Professionals including managers, administration, and the like.
• Class Two –Shop assistants, skilled manual labourers.
• Class Three- Skilled manual workers like plumbers and care workers. Teachers also fall into this class.
• Class Four – Unskilled workers (e.g. bartenders) and heavy manual workers, like mechanics and construction workers.

Please note: Not all occupations are covered by all income protection providers. You may need to look at several insurers to find the right cover. An independent insurance broker can help you find the best product for your circumstances.

As well as your occupation, you will also need to compare deferral periods, i.e. the time before you can make a claim for sickness payment. Typical payment deferral periods can be anything from 15-26 weeks. It is also worth noting that the amount you pay towards premiums can be brought down, in some cases. Namely, if you choose to extend your payment deferral period for as long as possible. The amount you pay in premiums will also be decided by how long you want cover for, your earnings, health and what in the fine print constitutes your ‘inability to work,’ due to sickness.

If I have Income Protection Cover, When Must I Return to Work?

Some policies cover your income in times of sickness up until the point where you can return to your normal job. These are known as ‘own occupation’ policies. However, some insurers offer ‘any occupation’ policies, where you are covered until you have the ability to return to any type of work.

How Much Does Income Protection Insurance Payout?

This will depend on your provider. But as a benchmark, your payments may cover your period of sickness for anything from six months up to two years.

The amount of money you need will also affect your insurance premiums as well as your health, family medical history, age, and lifestyle habits. However, the industry is wide-ranging. High earners can find appropriate cover as well as average and low-income workers.

What are the Benefits of Income Protection Insurance?

• Extra Protection – State benefits and sick pay can only protect your income up to a point. Having your own financial protection in place will offer you and your family peace of mind, whilst you concentrate on your recovery.
• Work and Claim – With some income protection policies, if you can return to work for a reduced number of hours, you may still be able to claim reduced protection for the ‘missing’ time that would make up your normal working week. This will, of course, depend on the policy you opt for.
• Many Illnesses Covered- Many income protection providers offer protection for a wide range of illnesses. They may, however, differ in their definitions of incapacity. As long as you read the fine print before paying for any policy, you should be aware of the restrictions of your personalised plan.
• Sick Pay – If you receive proportional sick pay from your employer, you can still take out this form of insurance to cover you. This means that if your illness is short-term, you may be fine to survive on just your employee benefits until you’re fit enough to get back to work. However, you may not be able to claim on income protection if you receive full sick pay from your employer. Please check your policy’s fine print for more details.
• Claim for Long Periods – With income protection cover, it is possible to claim until you reach your selected retirement age. This could be anything from age 50 -70. With other forms of insurance, such as accident, sickness, and unemployment cover, you may only be eligible to claim for up to a two-year period.

Let’s Look at an Income Protection Insurance Example:

Gloria works as a florist and earns £1,300 a month. She takes out an income protection plan that would offer her a sickness income of £1,000 per month. The provider she opted for will protect her earnings for a period of five years and the premiums gradually increase as the length of the policy progresses. In the first year, Gloria will pay £20 a month for her cover. After two years, this will increase to £25 a month until finally, in the fifth year, she will pay £30 a month to protect her income.

What are the Pitfalls of Income Protection Cover?

• Pre-Existing Medical Conditions – Not all Income Protection Insurers will accept those with pre-existing medical conditions. Alternatively, some will only insure those who have certain pre-existing conditions. Further, in many cases, those with a condition may have to pay more towards premiums.
• Less Than Salary – With this form of financial cover, in most cases, you will not receive 100% of your normal wage packet in cover. It can be up to 80% of earnings, typically. So, you will need to make sure, before taking out this insurance, that you can still meet your living expenses on theses reduced funds.
• Underwriting – Income protection insurance requires careful planning on the part of the provider. This may mean you will have to answer many questions or undergo a medical, or supply medical records to set up your premiums. However, once you do this, the provider will have adequate information on you, so it may be more likely that a claim will be successful.
• No Redundancy Cover – A similar alternative to this form of protection would be Accident, Sickness and Unemployment Insurance. These policies incorporate cover for redundancy from work. This extra layer of protection may, therefore, be more attractive than income protection, for some people.
• Waiting Times – Depending on the provider, you may have to wait for a period of time before making a claim on income protection cover. Example waiting periods include 4, 8, 26, or 52 weeks. However, you may be given waiting time options when you take out policies with selected providers.

What are the Alternatives to Income Protection Insurance?

• Employee Benefits – Many employees will be covered for short periods off work from their employer.
• Savings – It is always wise to save some money away in case of an emergency. Dipping into these funds, for a short time at least, may alleviate the stress of keeping up with your bills in times of illness.
• State Benefits – You may be eligible to claim for financial aid from the government.
• Accident Sickness and Unemployment Insurance- These policies work in a similar way to income protection. However, the underwriting process may be less in-depth and the protection, generally, covers you for shorter periods of sickness. But please note, policy terms and conditions within this sector vary between providers.

If you would like to find the right income protection quote for your needs, get in touch with an advisor now. They can offer you a free, no-obligation advice.