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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.
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.
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;
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.
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.
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.
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.
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.
I was confused with what cover was best for me. My adviser explained the product in detail and now I am covered.
Sarah Thompson, London
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