Why do I need income protection insurance?

Have you ever wondered what your life would be like if you could not work for a few weeks or months? If you support yourself or your family, you probably worry a little about this. Everyone is at risk of illness, injury or traffic accidents, and in many cases, the consequences can be really unpleasant. In this article, we explain simply why income protection insurance is worth considering.

When is income protection most useful?

There are two main situations to consider:

• Income protection benefits come in handy when you lose the ability to earn money, for example due to illness, a car accident or other accidental event.

• Income protection insurance is most useful for the self-employed and those whose employers do not provide additional sickness benefits. Zero-hours contract workers are a good example. Employees who qualify can usually get Statutory Sick Pay (SSP) from their employer, but it is not a high amount: £123.25 a week or 80% of your normal weekly earnings, whichever is lower, for up to 28 weeks. If you are self-employed, you cannot get SSP.

Would SSP alone be enough to cover your bills? If you have a mortgage, you still need to keep up your repayments while you cannot work, as well as paying other living costs such as bills, food and travel. Also, not everyone has savings with which to function, especially over an extended period of time. Are you one of those people who could live off the money in a savings account for three months?

The solution to this problem, in addition to regular saving, is insurance, which we are looking at today.

What is income protection insurance in the UK?

Income protection insurance is a long-term insurance policy that pays a regular income if you cannot work because of illness or injury, until you return to work or your benefit period or policy ends, whichever comes first.

For a neutral overview, see MoneyHelper’s guide to income protection insurance.

If a specific accidental event occurs that prevents you from working, the policy is activated. In this situation, the insurer will pay you a benefit of a certain value each month, calculated as a percentage of your regular salary. Of course, the amounts depend on the terms of your policy and the company you choose, but the benefit is usually limited to a percentage of your gross earnings, often around 50% to 70%, depending on the insurer. If you are self-employed, the benefit is usually based on your share of the business’s taxable profits before income tax. Some insurers average these profits over the last few years and check them against tax returns (such as an SA302 tax calculation) or business accounts. The exact rules depend on the insurer. Benefits from an income protection policy you pay for yourself are normally free of income tax.

When will I receive my money? For how long will I receive it?

You receive money from your policy until you are able to return to work, your benefit period ends or the policy ends, whichever comes first. There are much greater differences in terms of first payouts. Before you receive the money, a deferred period, which is defined by the contract, must have passed. This is the period from the occurrence of the event / injury until the insured person is eligible to receive the first payment. The length of the deferred period depends on the policy you choose and can range from a few weeks to a year. A longer deferred period usually means a lower premium, so it is worth matching it to any sick pay from your employer and to your savings.

Policies also vary in their maximum payout times. Depending on the policy you take out, this could be, for example, one year, two years, five years or, in the most comprehensive option, until the policy ends (often at an age you choose, such as your planned retirement age). The longer the coverage, the higher the premiums usually are.

Example:

Jack has taken out income protection insurance with a deferred period of four weeks. If his health means he cannot work for three months, his benefit will only cover the time after the first four weeks, not the whole three months.

What affects income protection insurance premiums?

As with any policy, the premiums depend on a number of factors. The most important of these include:

• the type of policy (benefit period, deferred period)

• the type of work you do (the riskier the occupation, the more expensive your insurance will be)

• Your age (older people are more susceptible to injury or illness)

• your medical history (people with a history of illness or serious medical conditions are a greater risk to insurance companies). Depending on your health history, an insurer may exclude a pre-existing condition, offer cover on special terms or charge a higher premium, so answer the health questions fully and honestly.

• the amount the insurer will pay you

• the period for which you will receive the benefit

Example:

If you have been treated for, or seen a doctor about, back problems such as sciatica or disc problems, an insurer may exclude back conditions from your policy. When you make a claim, the insurer may also ask for medical evidence, such as a report from your GP.

Who can take advantage of income protection insurance in the UK?

Income protection insurance is simply a safety net for anyone who may lose their income due to some random event and at the same time does not have adequate savings. Income protection may be particularly relevant if you are self-employed and do physical work or work outside the home. If you are a construction worker, work in a warehouse or are a courier, virtually any injury or illness will prevent you from earning money normally.

Eligibility criteria, such as your age, occupation, residency and the hours you work, vary between insurers.

How much are income protection premiums in the UK?

There is no single price for income protection. Your premium depends on your circumstances and the policy you choose, including your age, health, occupation, the amount of benefit, the deferred period and the benefit period. The most reliable way to find out what cover would cost you is to compare personalised quotes.

How do I choose the right policy?

Choosing a policy is never easy. After all, when it comes to income protection insurance, it’s not just about you, but also your family. What tips can we give you right now?

• It’s worth getting help from an insurance broker, such as Extend Finance

• Determine the amount you need to live decently on your policy

• Estimate your savings and gradually increase them, even if you take out a policy

• Ask your broker if it is possible to buy income protection insurance as a package with life insurance or private medical insurance (PMI). You may be able to save some money.

• Take care of your personal finances, for example by consolidating debts

• Read your insurance contract carefully and compare quotes from the whole market, not just one company

• Try to increase your income so that the sum insured is higher

Are you planning to buy income protection insurance? If so, we would like to invite you to a free consultation at Extend Finance! During it, we’ll answer all your questions, advise you and check that you’re not overpaying for your current financial products. To make an appointment with us, fill in the contact form on the website!