Income protection guide

Those in very good jobs will usually receive generous sickness benefits through the workplace and these may extend right up until the date upon which they had intended to retire. The majority of employees with long-term health problems will, on the other hand, find themselves having to rely on the state, which is likely to prove hard.

The exact amount of state help that will be available will vary according to factors such as your age, savings levels, number of dependants and housing situation, but it amounts to little more than £80 a week in the first year of incapacity. Our income protection guide is here as a source of income protection advice.

What is income protection insurance?

Income protection insurance is payable through monthly premiums - and in return will pay out a regular tax-free income if you are unable to work as a result of long-term sickness or disability. Financial planning experts frequently argue that this should be a cornerstone of most people’s financial planning.

Income protection insurance can enable you to receive benefit payments of up to around half your income if you are unable to work due to long-term health problems. These payments will continue until you recover or, if you fail to do so, until the end of the policy term – which is typically your intended retirement date.

Income protection insurance is also known by names like ‘income replacement insurance’ and ‘permanent health insurance’. However, care should be taken not confuse it with short term income protection insurance (STIP) or payment protection insurance (PPI), which is significantly different:

Payment protection insurance (PPI) and Short term income protection (STIP)

PPI can cover unemployment as well as accident and sickness, but its great drawback is that it only pays out for a maximum of 12 months (or in some cases 24 months). Someone with a long-term illness or injury could therefore still find themselves without an income for many years.

It is essential not to confuse any forms of PPI with income protection insurance. In this respect, it is especially important to be aware that short term income protection insurance (STIP) is often incorrectly called income protection insurance – which can be very misleading. Like PPI, STIP only pays out for 12 or 24 months. For more information on payment protection insurance see our PPI guide.

What does income protection insurance cover?

IPI covers you if you cannot work because of illness or injury, but not unemployment. Applicants must answer a detailed health questionnaire and, if the underwriter requires further information, they may write to your GP or ask you to undergo an independent medical examination with a doctor in your area. In some cases, therefore, the initial process can take several weeks.

IPI restrictions and exclusions

This detailed underwriting can also mean that you have exclusions imposed for medical conditions that you have already suffered from. If you have a history of back pain or stress-related disorders, in particular, you are likely to find that these are excluded.

The individual underwriting also means you could find that the premiums you are eventually offered differ considerably from that originally quoted. Factors that can have a major impact on premiums include your age, gender, smoking habits and – most importantly of all – occupation.

Underwriters know that those in certain jobs are far more likely to claim than those in others. Roofers may, for example, be required to pay four times the standard headline rate to reflect the fact they are exposed to a greater than average personal injury risk.

Income protection advice

• Premiums will be affected by the amount of monthly cover you choose, the length of the cover period, and by the length of the initial ‘deferred period’, which is the amount of time that elapses between when your claim occurs and when the benefit payments actually start
• Exactly which insurance company you select will also have a major bearing on prices, because some offer much better value than others
• The company with the cheapest premiums is not necessarily the best value

Check the small print, because:

• some policies have lower than average maximum benefit limits;
• some insurers insist on making significant deductions for other income you receive while making a claim;
• some insurers quote on a basis of cover that remains flat throughout the term, while others quote for escalating cover that keeps up with inflation;
• some quotes will refer to premiums that remain ‘fixed’ throughout the term, while others will be for premiums that are subject to regular pricing reviews to ensure they are reflecting the insurer’s overall claims experience;
• watch out for the definition of disability used by the insurer to trigger a claim. Most pay out if you are unable to do your ‘own occupation’ but some only pay if you are unable to do ‘any occupation’.

A little knowledge can certainly be a dangerous thing with income protection insurance, and even those who pride themselves on being ‘clued up’ should be aware that this market is subject to constant change in terms of the innovative new products that are being launched. Reading our income protection guide is a great start, but you might want to seek professional income protection advice before taking the next step.