Income Protection Insurance

If you were to lose an income due to illness or an accident, you could struggle to keep on top of your essential outgoings, such as mortgage and rent.  Income protection is a long-term insurance policy that provides you with a regular income until you retire or are able to return to work.

Doesn’t my employer cover this?

People often assume that their employer will continue pay when they are not able to work.  In reality, very few employers support their staff for more than a few months if they’re off work due to sickness. Employees are usually moved onto Statutory Sick Pay within six months which provides a payment of £96.85 a week for 28 weeks.

We recommend that you check what your employer will provide for you if you’re off sick.

How does income protection insurance work?

• provides regular payments that replace part of your income if you’re unable to work due to illness or an accident
• pays out until you can start working again – or until you retire, die or reach the end of the policy term – whichever is sooner
• typically pays out between 50% and 65% of your income if you’re unable to work

• covers most illnesses that leave you unable to work – either in the short or long term (depending on the type of policy and its definition of incapacity)
• typically can be claimed as many times as you need to while the policy lasts.

There’s often a pre-agreed waiting ‘deferred’ period before the payments start.  The most common waiting periods are 4, 13, 26 weeks and a year.  The longer you wait, the lower the monthly premiums.

It’s not the same as critical illness insurance, which pays out a one-off lump sum if you have a specific serious illness.

Who needs income protection insurance?

Only 9% of UK adults carry some form of income protection insurance (Source: www.insurancebusinessmag.com).  For everyone else it should be considered unless you are happy to cover the loss of income from savings or can cover all your costs from state benefits.

This cover is equally as valid for the self-employed as it is for employees.

How much cover do I need?

It depends on the level of savings you have.  The loss of an income can soon leave you unable to pay essential household bills, including mortgage/rent and utilities.  If you take into account these fixed costs, this will give a guide to the level of cover you need.

Typically, individuals purchase cover for 50% of income.  This is sufficient in most cases as benefits are paid free of tax.

The position is different if you are in an employer’s scheme where benefits are subject to tax and National Insurance deductions.

How much does income protection insurance cost?

The amount you pay each month in premiums will depend on the policy and your circumstances.

The cost can be affected by:

• your age
• your occupation
• whether you smoke or have smoked
• the percentage of income you’d like to cover
• the waiting or ‘deferred’ period until the policy pays out
• the range of illnesses and injuries covered
• health – your current health, weight and family medical history.

The cost will also depend on whether you pay:

• a standard premium, which the insurer can increase over time, or
• a guaranteed premium, which remains fixed for as long as you have the policy.

Guaranteed premiums can cost slightly more in the short-term, but many people like the security of knowing what they’ll be paying in future.

Want to discuss this further?

Please contact us at info@mmwealth.co.uk or telephone 01223 233331.

Take a look at our financial protection services

Disclaimer

Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.

The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The Financial Conduct Authority does not regulate tax planning.