Income protection insurance: what it is and how to get the best coverage

The question of whether or not you need income protection insurance is less likely to come up, in part because we don’t like to think something could go wrong, but also because it’s all a little boring.

And anyway – isn’t that what life insurance and even critical illness insurance is for its cousin?

The majority of us will have to take some form of protection at some point in our lives—whether to give us the peace of mind of paying off a mortgage, or to ensure the family’s finances are secured in the event a breadwinner or other becomes seriously ill. to work or worse.

But what many consider the most worthwhile form of protection insurance — insurance that pays you a monthly income if you’re unable to work — has flown under the radar for the majority of people.

Income protection insurance, also known as income compensation, protects your monthly income if you can no longer work due to injury or illness.

It’s never been a bestseller—partly because it’s seen as complex, more expensive, and paid monthly rather than a one-time lump sum.

It also didn’t help to combine income protection with the infamous “Payment Protection Insurance,” also known as PPI.

Although the names are similar, these two types of wrap are worlds apart in what they actually offer.

PPI covers the debt, and the payment goes to the lender. It was widely missold for years, and the subsequent scandal is perhaps the most famous case of financial wrongdoing in British history.

Income protection insurance is completely different.

This type of insurance pays you if you can’t work because of an injury or illness, such as a back injury, stress, or a chronic condition such as multiple sclerosis.

Unlike critical illness coverage, it doesn’t pay you a lump sum — instead it will provide you with a monthly income of up to 80 percent of your salary until you are healthy enough to return to work or retire.

Some experts argue that this little-known form of coverage is actually the best form of protection insurance if the right is purchased.

Get the right level of coverage

One of the main considerations you should make when taking cover is whether you want a policy that will pay if you are unable to do your job, only if you cannot do a similar job or if you cannot work at all.

Policies generally fall into three different categories: “activities of daily living,” “appropriate occupation,” and “special occupation.”

The Activities of Daily Living policy is the lowest level of income protection cover. This cap will only be paid if you are unable to complete certain tasks, such as walking or lifting.

Because the cover is limited, this is usually the cheapest form of income protection. It has a bad reputation and many experts agree it should generally be avoided.

If you are insured on an “adequate job” basis, you will likely not receive compensation if you are still able to work in a role the insurance company believes you are “suitable” for after your injury or illness.

The ‘right’ career is determined by your skills, experience and qualifications.

For example, a teacher who can no longer work in a secondary school due to stress may still be able to work in an elementary school.

If the insurance company believes that you can move to another occupation that suits you despite your injury or illness, you will not receive compensation.

The “private job” cover ensures that you are specifically unable to do your job – eg. The job you hold at the time a claim is filed.

Since this is the highest level of protection, this is the most expensive type of income protection.

There are a lot of income protection policies around, but it is essential to realize that they are not all the same. Cheap coverage may not be provided when you need it, so it is worth paying for a good insurance policy.

What do I need to ask my business?

One of the first things to do when considering getting cover is to check with your employer what sickness benefits you are actually entitled to.

Some employers will pay your entire salary for a set period, before reducing the amount they pay you over time.

In this case, “tiered” protection can help make up the difference. This means that you will have the option to choose two different levels of coverage, each with a different monthly interest, which are paid at different times.

You may already have some form of income protection, and not realize it.

Some employers offer some form of this insurance as an employee benefit. Ask your business what you are actually covered if you are not sure.

What should you pay attention to when making a policy?

When you purchase this type of coverage, the premiums are guaranteed or subject to review.

If it is guaranteed, it means that it will remain the same for the duration of the policy. If it is auditable, this means that it will be reviewed and changed, usually every five or 10 years.

It can be a good idea to speak to an experienced independent consultant when choosing exactly the type of coverage you need.

You will also need to consider the age at which the policy must end. Usually, it’s around 65 to coincide with retirement although it’s also possible to have shorter-term policies.

Not all income protection policies pay out at the same time. You will have a pre-agreed period that must pass after your claim before you get your return – this can range from one month after you submit your claim to a year.

This is known as the “holding” period, and your policy will be cheaper the longer you have to wait.

You’ll also need to consider the effects of inflation on your payments if you’ve been out of work for an extended period.

If your policy only pays a percentage of your salary as it was at the time of the claim and does not rise in line with inflation, your cost of living in the future may exceed your income.

When undertaking this type of insurance, you will have the option of tying your insurance cover so that it rises with the retail price index, or consumer price index.

But remember that this means your premiums will also go up with inflation.

Are there alternatives?

A similar type of insurance is known as accident, sickness and unemployment coverage. This is usually a short-term policy that can replace your income for up to a year if you get sick, have an accident, or become redundant.

Although it is usually sold as a single package, both Accident and Sickness and Unemployment coverage can be purchased separately as a standalone cover.

These products usually cover about 50 percent of your income, and you only pay for a set period. This is why they are considered an inferior income protection product.

While the premiums are much cheaper, there is no guarantee that you will be covered if you are unable to work for longer than the specified period.

There is also critical illness insurance Pays a lump sum tax free if you are diagnosed with any combination of diseases listed in your terms and conditions, including some forms of cancer.

In the past, most providers only paid if the disease was fully developed. But now many insurance companies pay at least something for an early stage diagnosis.

Unlike income protection, critical illness pays as a lump sum.

If you have any other form of protection insurance, there may already be some clauses listed that protect your income in the event of injury or illness.

Double check the policy wording on any insurance policy you have. Also, be wary of cheaper policies that sound too good to be true.

Insurance companies will want to know about pre-existing conditions, or diseases that run in your family. They may not cover you for those specific illnesses in these cases, so always check what you’re actually covered for.