If you couldn’t work due to a serious illness, how would you manage? Could you survive on savings or your sick pay from work? If not, you will need some other way to pay the bills and you might want to consider income protection.
What is income protection?
Income protection insurance (which used to be known as permanent health insurance or long-term disability insurance) is a long-term insurance policy designed to support you if you can’t work because you are ill or injured.
It replaces part of your income if you can’t work and it pays out until you can start working again or until you retire or the end of the policy term, whichever is sooner.
There’s a waiting period before the payments start, and this is normally set to start after your sick pay ends, or after any other insurance you have stops covering you.
Despite the fact though that Income Protection can provide the vital funds to help pay the bills and cover everyday household expenditure, why do many people not have any income protection insurance?
Cost is an obvious reason, but another is understanding the options available and qualifying the level of cover. The level of cover available needs to be restricted because human nature being as it is, if someone is financially better off after claiming on the insurance policy than they would be if they were still working, the likelihood of most people returning to work would be reduced. It is therefore for this reason that income protection policies taken out by an individual are often restricted to providing cover of 55% (less any other cover and state benefits) of their pre-disability income. If a claim is made though, the income will then be paid tax free.
The options available can be confusing but we have summarised below some of the most important that need to be understood:
Incapacity will usually be defined on one of the following four bases:
• Own occupation – unable, following illness or accident, to perform their own occupation and are not working in another job.
• Suited occupation – unable, following illness or accident, to perform an occupation suitable to them given their education and training.
• Any occupation – unable, following illness or accident, to perform any occupation at all.
• Activities of daily living (ADLs) – unable, following illness or accident, to perform a number of defined functions such as dressing and undressing, washing and eating. The policy will explain the number of functions and their definitions.
Deferred Period – this is the period following illness or injury after which a claim will be paid. This is most commonly 4 or 13 weeks although it is also possible to choose a deferment period of 26, 52 or even 104 weeks. The longer the deferment period the lower the premium will be, and vice versa.
Proportionate benefit – to encourage the return to work of a policyholder recovering their health, many life offices offer to pay a reduced benefit if the policyholder takes a part-time or lower-paid job after recovering their health.
These are a few of the considerations but ultimately the cover will be preferential to relying on state benefits and the erosion of assets which you may have spent many years building up!
It doesn’t matter whether or not you have children or other dependents; if illness would mean you couldn’t pay the bills, you should consider income protection insurance.
This is most likely if you’re selfemployed or employed and you don’t have sick pay to fall back on. However, you also need to be sure you can afford to keep paying the premiums, which can be expensive, because if you stop paying the premiums the cover will cease.
You may not need income protection though if any of the following applies:
• Your partner or family would support you for as long as you are unable to work
• You could get by on your sick pay. For example, if you have an employee benefits package which gives you an income for six months or more, so you can keep paying the mortgage and other bills as long as you are not off work for too long. But consider how you will cope after the sick pay ends.
• You think you could survive on government benefits. Be careful though, they’re much less than many people think.
• You have enough in savings to support yourself – but remember that your savings may need to see you through a long period without being able to work.
• If you’re already near retirement age, perhaps you could afford to retire early – and if you are unable to return to work you may be entitled to take your pension early.
This article is for information purposes only and by no means should be construed as advice. You should contact an Independent Financial Adviser to clarify any of the issues raised.Quest Financial Solutions do not take any responsibility for actions taken as a direct result of reading this article.