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’re on your own and have a 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. If you want to protect yourself at least a little against such risks, be sure to read our article, in which we describe as simply as possible why it is worth considering income protection insurance.

When is income insurance most useful?

This question can be answered in two ways:

• 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. In principle, any person can count on the government’s sick pay, but the amount is definitely not high, as in 2023, the payment is £99.35 per week.

It is hard to expect the £400 a month you receive from the government to be enough to live comfortably. Mortgage borrowers are in a particularly bad situation because the monthly average instalment is higher, and yet you still have to pay other living costs such as bills, food or metro or bus tickets. 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, in case of beeing unable to work, provides a regular income until you retire or return to work.

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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 as a general rule, it is between 50% and 70% of your gross earnings. If you are self-employed, the net pay from the annual settlement (SA302) is used to calculate the benefit. Very importantly, insurance payments are not subject to income tax.

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

You receive money from your insurance policy until you are able to return to work, the payout period has passed or, if the injury is permanent, you retire. 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. As a rule, this is a week, but there are also insurances with a deferred period of a month or even six months! Obviously, this detail has a huge impact on the premiums and cost-effectiveness of a particular policy, because in the vast majority of cases you will need the money within a week or two and it will take less than, for example, half a year to recover.

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 favourable option, the time until you reach 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 one week. This means that if Jacek’s health situation does not allow him to work for a month, the policy will only take effect from the 8th day of incapacity and the payout will cover the absence for three weeks, not four.

What affects income protection insurance premiums?

As with any policy, the premiums depend on a number of factors really. 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). Please note that past medical conditions will automatically be excluded from your policy.

• the amount the insurer will pay you

• the period for which you will receive the benefit

Example:

Existing back problems (sciatica, disc problems and other conditions) for which the client has been treated or consulted by a doctor (GP, specialist or emergency room) will be excluded in the policy. The insurer will ask for a medical report from a general practitioner (GP) at the time of making a claim.

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

As it is not difficult to deduce, 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. From experience, we can recommend such policies to self-employed people who are in occupations that involve movement, or more broadly, 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.

As a condition of taking out the above policy, you must be registered with a general practitioner (GP) for a minimum of one year. Most insurance companies require a longer, minimum three-year registration period.

How much are income insurance premiums in the UK?

On average, income protection insurance premiums in the UK are currently:

Age of insured person Lowest amount Average Highest amount 20 £8.48 £19.79 £31.09 30 £12.59 £27.13 £41.67 40 £19.70 £40.57 £61.44 50 £36.07 £69.98 £103.88 Insurance for £1,500 per month for a period of 12 months. Insured person with no health problems

In the vast majority of cases, income insurance premiums will not exceed £30 per month. Of course, it is possible to configure the policy in any way you like, including so that it costs you more than £150 per month. You can achieve this by extending the cover to include redundancy, performing a risky occupation, and setting the benefit amount to a high amount, for example £3,500 per month.

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!