Do you need income protection insurance?
If you couldn't work due to a serious illness, how would you manage? Could you survive on savings, or on your sick pay from work? If not, you'll need some other way to keep paying the bills - and you might want to consider income protection insurance.
What is income protection insurance?
Income protection insurance (which used to be known as permanent health insurance or long-term disability insurance) is a long-term insurance policy designed to support you if you can't work because you're ill or injured.
- It replaces part of your income if you can't work for a while because you're ill or disabled.
- It pays out until you can start working again or until you retire or the end of the policy term whichever is sooner.
- There's a waiting period before the payments start. You generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the premiums.
- It's not the same as critical illness insurance, which pays out a one-off lump sum. Income protection insurance pays a percentage of your gross salary or take-home pay (you can decide how much - usually set at about half or just over), and you can claim as many times as you need to, while the policy lasts.
- It's not the same as short-term income protection, which also pays out a monthly sum related to your income, but only for a limited period of time (normally between two and five years) and usually covers fewer illnesses or situations.
What does income protection insurance cover?
It covers most illnesses that leave you unable to work - but whether that means 'unable to work at your current job' (perhaps due to work-related stress) or 'unable to work at all'(perhaps due to a serious heart condition) depends on the type of policy you choose and the definition of incapacity in your policy.
There are three definitions of incapacity, which form the three basic levels of cover you can get.
Always check the policy and make sure you understand all the definitions before you buy. This is why we would recommend seeking advice from Sutton McGrath Hartley Financial Services.
What income protection insurance doesn't cover
Usually your policy comes with a list of specific illnesses or situations it won't cover, called exclusions. These may include one or more of the following:
- pre-existing medical conditions (any illness you already knew about when you bought the policy)
- normal pregnancy
- self-inflicted injury
- disabilities or illnesses that are due to criminal acts
- misuse of alcohol or drugs
- disabilities or illnesses if you are involved in war, riots, invasion, or terrorism
If you have existing health problems or a dangerous job you might not be able to get cover at all.
Do you need income protection insurance?
It doesn't matter whether or not you have children or other dependent's - if illness would mean you couldn't pay the bills, you should consider income protection insurance.
You're most likely to need it if you're self-employed or employed and you don't have sick pay to fall back on.
You also need to be sure you can keep paying the premiums, which can be expensive. You need to set your premiums at a level you can afford to balance your current budget against the peace of mind that having income protection cover gives.
You probably don't need income protection insurance if...
- You could get by on your sick pay - for example if you have an employee benefits package which gives you an income for six months or more, so you can keep paying the mortgage and other bills as long as you are not off work for too long. But consider how you will cope after the sick pay ends.
- You could survive on government benefits - be careful though, they're much less than many people think.
- You have enough in savings to support yourself - remember that your savings may need to see you through a long period without being able to work.
- You could take early retirement - if you're already near retirement age, perhaps you could afford to retire early. If you are unable to return to work you may be entitled to take your pension early.
- Your partner or family would support you - perhaps your children are grown up and your partner has enough income to cover everything the two of you need.
- You have debts or no savings - if you could afford to save money or buy income protection insurance, but not both, you may consider it better to save. And paying off debts is the first step in any financial plan.
Is income protection insurance good value for money?
It depends on the policy and your circumstances. Usually income protection insurance covers a wide range of illnesses and situations and has the potential to pay out for many years.
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