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Income Protection

Replaces part of your income if you are unable to work for a period of time because of illness or disability, and will continue to pay out until you can return to some kind of paid work or reach retirement, whichever is sooner.

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Income Protection

Income Protection Insurance will pay you a proportion of your salary in the event of you being unable to work due to accident or sickness.

Premiums are dependant on your occupation and benefit required (you can normally specify up to 60% of your gross salary). When calculating the benefit you require, you must consider your outgoings in full and how many can really be reduced/removed if you are unable to work due to illness/disability.       

What Does It Do?

It replaces part of your income if you are unable to work for a period of time because of illness or disability, and will continue to pay out until you can return to some kind of paid work or reach retirement, whichever is sooner.

It has a waiting period (called the deferred period) before it will start to pay out. Generally, the longer the waiting period, the lower your premiums will be, so it is important you find out what income you can get from your employer, and other insurance (such as mortgage payment protection insurance) in the event of illness or disability. This cover might not be available to you if you have a pre existing health problems or a dangerous occupation.

Key things to consider

If you are an employee and you fall ill, your employer might pay you your full pay for a specified time – however presumably this will end at some point?  By law, an employer must pay most employees statutory sick pay (SSP) for up to 28 weeks, though this will probably be a lot less than your full earnings. Currently (From 6 April 2013) the standard weekly rate for SSP is £86.70 a week – or roughly £346.80 per month - so could you really live on £346.80 per month?
You will need to check if your employer is paying into a group income protection scheme on your behalf – some employees receive this as a perk of their job, which can pay out an income after the statutory sick period. So check what you are entitled to.

If you are self-employed, you won't have this option. State benefits are not generous and you would probably see a substantial drop in your income if you were out of work for more than a few months because of illness or disability.  

The maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for State benefits you can claim. This usually translates into a maximum of, 50% to 65% of your before-tax earnings.

Example of working out how much cover you might need

Andy is single and earns £30,000 a year before tax and other deductions. He estimates that, if he was ill for a significant amount of time, his budget would be affected as shown in the table below.

Andy's budget calculations in the event that he couldn't work

His estimates

Income he would lose
His take-home pay

£21,000

Deduct income he would gain
Approximate long-term incapacity benefit

£4,000

Deduct expenses Andy would save
Work-related costs (such as travel, food and clothing)

£3,000

Add extra expenses he would pay
Allowance for, special equipment or treatment, cost of heating his home longer

£4,000

EXTRA INCOME NEEDED

£15,000

Andy believes he would need around £15,000 a year to maintain his lifestyle. This is half his take home pay of £30,000. The level of cover you have selected will pay out on a successful claim until the following arises in most cases. You are no longer incapacitated, you are no longer suffering a loss of earnings, the termination age of the policy has arisen or you have reached your chosen retirement age, you are remanded in custody or you die.

Before deciding on the waiting period (deferred period) Andy will need to check what if any salary will be paid outside the statutory sick pay period of 28 weeks (from 6 April 2013, the standard weekly rate for SSP is £86.70 a week).

Factors that Influence the Monthly Cost

Your monthly premium throughout the term of the policy will depend mainly on:

·        Your Age – at the time you start the policy. Older people are more likely to suffer an illness, so pay more.

·        Your Health – at the time you start the policy. If you have existing health problems you might be refused cover or have to pay more.

·        Your Occupation – some jobs are more likely than others to contribute towards illness. For example, a bank clerk is deemed to have a very safe job but a deep sea diver runs high risks and so would have to pay more.

·        Hobbies and Lifestyle – for example, smoking makes you more likely to become ill, so you'll pay more.

·        Waiting Period – once you claim, there is a delay before payments start. You can choose how long this is, for example from 4 weeks up to 104 weeks. Generally the longer the waiting period, the less you pay.

·        Health If your health is poor or your lifestyle is considered risky, you may be refused cover or have to pay more than normal.

Some policies reduce the amount you get on a monthly basis if you receive State Benefits or claim money under any other insurance policy.  Also occupations classes can differ from Insurance Company meaning that not all insurers put the same job in the same risk categories. Some policies only pay out if you can't do any work, but you would have to be seriously incapacitated for you not to be able to work at all. Others cover being unable to do any work for which you are suited. The best pay out simply if you can't do your normal job, but premiums tend to be more expensive.

A common misconception is that Critical Illness Insurance – (which pays out if you are diagnosed with a life-threatening condition listed in the policy) is a cheaper and simpler alternative to Income Protection Insurance. This is not the case as there are lots of common situations when Critical Illness Insurance would not pay out, for example if you had back problems or a stress-related illness. Additionally, not all occurrences of the Critical Illnesses listed are covered, for example some early stages of cancer are not covered.

Did you Know?

Income Protection is not Unemployment cover - Income Protection Insurance pays out an  income after the statutory sick period ends – Income Protection (IP) policies are designed to provide a regular income if you can’t work due to illness or injury, not when you lose you job – i.e. it is not unemployment cover!

 
 

Life Cover For All LLP (Registered in England under company Reg No OC359631) is an Appointed Representative of
Access Wealth Management, The Beacon, Beaufront Park, Anick Road, Hexham, Northumberland, NE46 4TU
which is authorised and regulated by the Financial Conduct Authority

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