What is Income Protection Insurance?

Income Protection Insurance or Permanent Health Insurance (PHI) policy as it is sometimes known, will provide you with an income if you are unable to work due to accident or sickness.

When should it be used?

If you are the sole or main earner in a household and losing your income would cause you or your family financial hardship.

If your employer does not provide long term sick pay and the state benefits to which you may be  entitled would not maintain your lifestyle.

Main features

The income payments will start at the end of an initial waiting period, called the deferred period, which is normally 4, 13, 26 or 52 weeks.

The deferred period is selected at the start of the policy and is usually linked to the sick pay benefits paid by your employer.

Income is paid until you either return to work, die or the policy term expires.  The policy term is normally linked to your expected normal retirement age.

The cost is based on the  amount of cover you require, the deferred period, the term of the plan, your gender, your smoking status, your occupation and your current level of health.

The definitions of disability vary considerably.  Generally, in order to make a valid claim, the policyholder must demonstrate that he or she is ‘totally unable by reason of sickness or accident to follow his or her own occupation, or any other for which he or she is suited by reason of experience and/or qualifications’, or ‘any occupation whatsoever’. The definition of disability, i.e. whether ‘own occupation’ or ‘any occupation, is obviously crucial and should be a major consideration when comparing different insurers.

Premiums can be fixed or reviewable. If they are fixed they will not be changed during the term of the plan, a reviewable premium means that the insurer can increase the cost of the plan at specified review dates.

The main objective of an Income Protection policy is to replace earnings lost through accident, illness or disability without reducing the insured’s financial incentive to return to work.  All Income Protection policies therefore stipulate a maximum income benefit limit.  Typically, this is in the region of 60% – 75% of the average monthly earnings of the insured in the year prior to disablement. However, benefits are free from income tax (unless provided through a corporate policy arranged by your employer). Benefits from other Income Protection policies will usually be taken into account, and it is common for State incapacity benefit to be taken into account in calculating the benefit limit.

It is important that cover is reviewed on a regular basis and in order to maintain its purchasing power, many providers allow you to build in an annual increase to help mitigate the effects of inflation, this will also increase the monthly premium.

Advantages

  • Your income will be at least partly replaced, lessening worries about how financial commitments will be met
  • The plan can be set up to meet your specific situation, particularly with reference to the deferred period and the end of the plan
  • A sum assured can be selected to meet your budget or income requirements
  • Income Protection provides cover for some illnesses generally not covered by critical illness policies, for example back pain or stress

Disadvantages

  • No lump sum is paid
  • It is possible that a relatively serious illness could be contracted but no payment made by an Income Protection policy because you return to work before the end of the deferred period
  • Income Protection policies rarely accrue a value

Next steps

If you feel that you need to review this area of your financial planning then please contact us either by calling us on 0115 933 8433. Alternatively you can email us at info@investmentsense.co.uk

We will discuss your requirements with you, and make a recommendation having considered your circumstances  and any existing cover that you may have.