Income protection insurance is designed to provide you with a guaranteed monthly income should you suffer an extended absence from work due to sickness or an accident.
A sensible precaution for us all if we stop to think about it; after all how would the typical family cope if they faced a significant reduction in income for say three months or more. How would we cope with the mortgage or rent, the household bills, credit cards, loans and the rest?
In 2014/15, 23.3 million days were lost due to work-related ill health and 4.1 million due to workplace injuries (1). Yet evidence suggests that only 2% of UK households actually have some form of income protection (2) and it’s possible that many are put off by the many misconceptions that surround income protection cover.
So let’s take a look at a few of them to establish the real facts.
It’s not important to have cover
Many people may well consider that paying for income protection insurance is a waste of money and that it’s not that important anyway. Perhaps we all simply take our health for granted and assume it won’t happen to us. Yet if almost 27.5 million working days were lost in 2014/15, it is most certainly happening to someone. And probably someone who felt that cover wasn’t that important!
The monthly cost of income protection can be a good deal less than you think and, if the cover was going to ensure you receive between 50% and 70% of your normal income in the event of a lengthy absence, just imagine how that would help with the bills and your family’s peace of mind.
Income protection covers redundancy
Income protection does not cover redundancy. The objective of income protection insurance is to provide you with a regular income if you are off work for any length of time due to sickness or an accident. Many people confuse this type of cover with payment protection insurance (PPI) or mortgage payment protection insurance (MPPI) which covers specific repayment commitments you may have to meet. These payments usually stop after a defined period which is normally between 12 and 24 months, whereas income protection cover can cover a significant proportion of your normal income and the monthly payments so you can continue to be paid until you’re able to return to work, or even until you retire altogether.
The state will provide enough to see me through
It’s true that if your average earnings before deductions, such as tax and National Insurance (NI), are £112 per week or more, you will be entitled to statutory sick pay at a rate of £88.45 per week. However income tax and National Insurance will be deducted from the payments (3). This is not a great amount left each month to meet all those mounting household bills?
You may also be entitled to some sick pay from your employer which will help, but this is normally only paid for a specific and limited period of time.
With income protection insurance you have the opportunity to provide yourself with a significant proportion of your normal monthly income (up to 70%) paid to you as tax-free benefits every month until you are ready to return to work or to retire, whichever comes first.
Income protection is too expensive
While it is important to regularly review your household income and budgets, and plan to make savings and investments whenever possible, it also makes sense to explore ways in which you can protect that valuable income on which so much depends, should the unexpected happen.
With some research you’ll find that income protection cover is not necessarily as expensive as you might assume and most income protection cover plans provide options that allow you to arrive at a monthly premium that suits your pocket. For example you can choose a deferred or waiting period before you begin to receive the agreed benefits that suits your circumstances. Ultimately, this can allow you to arrive at a lower monthly premium.
It won’t happen to me
It’s natural that we should all assume that if we are in good health now, that condition is likely to remain stable for the foreseeable future. Yet the facts suggest that this may be a somewhat complacent point of view.
Research suggests that 1 in 10 of us is likely to need to take over 6 months off work due to ill health during our working life. (4)
Further research indicates we are 3 times more likely to go on long-term sick leave than we are to die during our working life. (5)
So while we all perhaps think we are immune from any serious illnesses or accidents, the reality is that these are factors we should consider for the future and taking out income protection insurance is one way to make sure we have sufficient monthly income to cope during any extended period of absence from work
My insurance provider won’t pay out
The facts indicate that this is a false assumption. Data from the Association of British Insurers (ABI) shows that in 2015 the percentage of claims that were met under various categories was 91.2% for income protection insurance. (6)
So provided that you’ve kept up-to-date with your monthly premiums and have given truthful personal information when you took out the policy, claims are nearly always paid out. It is important that you tell your income protection provider if your income has changed as you could be over-insured. If your income has changed the amount of benefit under plan needs to be adjusted to ensure you aren’t paying a higher premium than you need to. If you want to check for yourself whether your income protection provider will pay out, you can view most policy’s rating on Defaqto and double-check your chosen insurer’s claims pay out rates for yourself.
I already have PPI cover
They may sound similar but in reality these two types of insurance cover are worlds apart. PPI cover is taken out to insure the risk of you not being able to continue making repayments on loans or Credit Card debt you may have. So if you have PPI cover that may help with any debt repayments.
So what about all the other household bills – food, fuel, utilities, clothes and more? If your income drops significantly due to sickness or an accident, income protection insurance will provide you with a tax-free monthly income to help you maintain your current lifestyle through any extended period of absence from work.
I’m self-employed so I won’t be able to get income protection cover
You’ll find there are a number of companies who will offer income protection insurance to the self-employed. Having this type of cover can be viewed as even more important if you are self-employed, as if you do face a lengthy absence due to sickness or an accident, you may only have the state benefits to fall back on.
Some providers, such as us, will allow you to cover between 50% and 70% of your profit before tax. It is important to ensure that you cover a percentage of your profit rather than the revenue of your business as this will avoid you over-insuring unnecessarily.
Don’t make the mistake of thinking you can’t protect your income simply because you are self-employed. Do your research and there is a strong chance you will find cover that suits your particular circumstances.
It’s too much hassle filling out forms and the rest
Many income protection providers recognise that our time is precious and that we don’t want the fuss of ploughing through small print and filling in copious amounts of application forms. You’ll find that a number of providers have user-friendly web sites that allow you to compare the various policies, decide which seems to suit you best and lets you apply quickly and easily via the site.
If you want to check out any specific point regarding your circumstances, it makes sense to get in touch to be sure you have a full understanding of the cover you think you need. Applying for income protection is been made a quicker and more simple process with no lengthy delays while forms are printed, signed and mailed out at the mercy of the Royal Mail’s delivery service.
I already have income protection insurance
If you have already taken out income protection insurance, you have made a wise decision and ensured yourself peace of mind, should you face an extended absence from work.
However it’s equally important to ensure that you regularly monitor the level of cover your premiums are providing for you. If your circumstances change, such as a change of job or a significant increase in salary, it’s worth making the calculations to see if your existing level of cover is adequate to meet what may now be an improved, and perhaps more expensive, lifestyle provided by these changed circumstances. The typical family outgoings rarely stand still, as we perhaps move to a larger house or increase our commitments to loans, etc.
Hopefully now we’ve addressed some of the more common misconceptions about income protection insurance that surround income protection insurance and convinced you that it’s time to take another look to see how you might benefit?