A Complete Guide to Income Protection Insurance

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By Crispin O'Toole-Bateman

on Monday 12 August 2019

Woman sat by desk with headache

What is income protection insurance?

Your monthly salary is essential for your family’s financial wellbeing - after all, it pays for your home, keeps the power on and food in the fridge.

If you were to suddenly find it gone, the long-term effects could be devastating. As months go by, your savings get evaporated until they are completely dried-up, and you find yourself in anxious financial hell.

Imagine that if you were also struggling with an illness.

In the UK today, a huge number of people don’t realise that if they were to become sick or have an injury that they must recover from, that there’s little provision for their financial status during that time off work.

The assumption that there’s a requirement for your employment to provide you with sick pay is widespread, and sadly, quite wrong.

Statutory sick pay – the limit of an employer’s responsibility

Legally in the UK, every employer must provide a level of sick pay if their employees become ill. This is called Statutory Sick Pay (SSP) and is a rate determined by the government.

It is £94.25 per week and lasts for 28 weeks.

That’s a grand total of £2,629 paid over seven months. It’s the equivalent income of £4,900 p.a. and only for the first half of the year.

If you earn more than £4,900 per year and reach the days before payday scrabbling for funds, then there is little chance that SSP is going to be even close to enough.

And after those 28 weeks of minimal income you are left simply adrift. If you haven’t managed to recover enough to get back to work, then you are on your own and must start applying for state benefits.

Independent work sick pay schemes

Not all employers are bad bosses.

Many have set up their own independent system for sick pay within the companies they own and have some excellent provision for you if you work for them.

For those people, there’s a safety net. We recommend spending time analysing the terms of your employer’s sick pay scheme but there’s every chance it is comprehensive and a valuable part of your contract.

For those who don’t have such a luxury, you need some sort of salary protection.

Is income protection insurance worth it?

Income protection insurance is a personal policy you take out that replaces your salary if you become unable to work.

It’s not paid out in a lump sum, like critical illness cover or most life insurance policies, but deposits an amount in your bank each month to replace your loss of earnings.

It provides you with a financial safety blanket that allows you to concentrate on recovering after your illness or injury and gets you back to work as soon as possible without having incurred debilitating debt in the meantime.

What are the benefits of income protection insurance? How does it work?

Income protection (IP) works by having you pay a monthly premium to the provider.

Then, as long as you are up to date with your payments, if you find yourself unable to work you can make a claim and for the length of your recuperation you will receive a replacement salary.

The cover for income protection is considerably more valuable than statutory sick pay, and typically provides a tax-free income equal to 65% of your gross salary each month.

As the sum is tax free, the amount paid into your bank each month is considerably higher than 65% might suggest and could represent between 80% and 90% of your actual regular take home amount.

How much is income protection monthly?

Factors such as your salary, your health and your age play a big part in calculating the cost of your IP premiums.

For some, income protection is as little as £10 per month, while for others protecting a more significant salary it can rise to much more.

An average premium for long term income protection in the UK is between £50 and £80 per month, though it’s worth considering that those figures are skewed towards the more affluent customer who is more likely to take out the insurance.

Many of the variables that determine cost are out of your control and you simply have to accept the quote that is available, however, one factor in your control is the waiting period or offset period.

By having a longer waiting period you can significantly lower the cost of your income protection.

What is the waiting period? How long before I can claim income protection?

With any loss of income insurance there is a period between your income stopping and your insurance kicking in.

This waiting period (also called the deferral or offset period) can run from a couple of days to a full twelve months and is a large part of your income protection package.

Consider whether you are after short term income protection, to help if you were to break a leg or have an impressive bout of gastroenteritis, or a longer term type of cover designed to protect you if you are unable to work for a few years due to a serious illness.

These different types of income protection insurance will impact your possible need for a shorter waiting period – after all, if you do want your protection to be there for an illness that may only last two weeks, a month long waiting period does you no good whatsoever.

Another factor is your savings and whether you have enough put aside to carry you through for a while.

Financial advisors recommend a constant level of savings equivalent to three months’ salary in case of any sort of problem. If you have this to back you up, it may be worth setting a waiting period of two months or longer to save significantly on the premiums.

A third consideration might be your work sick pay scheme or even statutory sick pay. If that has an end date (like SSP’s 28 weeks), then you might only need income protection to take over if your illness extends beyond it.

Remember, however, that your work sick pay scheme may also have a deferment period – for SSP the waiting period is four days.

Your circumstances are going to mean a customised income protection plan tailored for you – there’s no off-the-shelf product that fits everyone.

Do you need income protection if you are self-employed?

The subset of people who do not have an employer, whether they are self-employed, or a director of a small limited company, have no financial help available to them from the government whatsoever.

Statutory sick pay doesn’t apply and if you are self-employed you will find yourself in the unenviable position of choosing between losing your income or being forced to continue working while sick or injured.

Income protection for the self-employed isn’t just a sensible choice, it’s a necessity. A long time of you being unable to work could see your entire business fold as you stretch its resources and even sell off assets desperate for income.

Tap here for more information regarding income protection for self-employed people.

Income protection FAQs

Does income protection affect benefits?

Benefits in the UK are either ‘means tested’ (your income and outgoings are considered) or not. Those which are provided due to care needs or disabilities, such as Child Benefit or Disability Living Allowance are not affected by your income protection plan.

However, anything that is means tested (for example Housing Benefit), would see the insurance as an income and adjust or deny the benefit as is appropriate.

Generally speaking, your income protection is unlikely to provide you with more take-home income than you were previously getting and so will not adversely affect any benefits you were already in receipt of.

It will, however, have an impact on your applying for additional benefits as part of your current circumstance.

Is income protection the same as PPI?

PPI (Payment Protection Insurance) and MPPI (Mortgage Payment Protection Insurance) are alternative insurance plans to help cover you if you are unable to meet your financial responsibilities regarding the repayment of debts or (with MPPI) your mortgage.

Income protection is different in that it isn’t tied to a particular outgoing. The money is yours to do with as you wish and though it can certainly be used to continue to pay your mortgage or current debts, there’s no legal requirement to do so.

It is possible to have multiple levels of insurance, and you could have PPI and MPPI as well as income protection insurance, but depending on the terms of your payment insurance, the income provided by the main IP insurance might render the PPI or MPPI irrelevant.

Can I get income protection with a pre-existing medical condition?

It is often the case that a pre-existing condition will mean your income protection comes with an exclusion clause. This would say that in the case of that condition recurring, you are not entitled to put in a claim for income protection.

Of course, different insurance providers have different rules and this is by no means a foregone conclusion.

It is important that you declare any pre-existing conditions at the time of application for income protection (and any other form of life insurance). Failure to do so constitutes fraud and can result in your plan not being paid out or even prosecution.

How do I choose income protection? What is the best income protection insurance?

At Unite Life we are specialists in insurance designed to help you and your family in times of hardship. Our team of experts in income protection insurance are here to help you get a policy to suit your personal circumstances.

As registered independent financial advisors, we are expertly placed to work with you to find income protection insurance that is within budget and with terms that work for you.

Talk to us about a menu of insurance cover that includes life insurance and critical illness cover as well as your income protection insurance.

Together, these three financial security packages will protect you and your family from any eventuality, making sure your mortgage is paid and your outgoings covered.

For more information, fill out our contact form or simply pick up the phone and give us a call using the number below!

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