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  • Writer's pictureGary Lumb

Income Protection - Product Guide

Income Protection is often misunderstood with most people wrongly believing that their employer, or the state would cover them if they were unable to work. This is in most cases incorrect with even the most generous employers only offering short term sick pay. It has also been well reported over the last few years the huge cuts to most welfare payments.

Let's look at the numbers, you are 15 times more likely to claim on an Income Protection policy when compared with a Life Cover policy. Royal London claimed that the average age for a claim last year was 44 and with the State Pension age rising to 67/68, for the average claim, they may have 24 years until their retirement.

The truth is that most people drastically underestimate both the likelihood that they will be unable to work long term and also the provisions they will need. If you earn £40,000 per annum then over a 20 year period this would potentially be over £1 million pound of gross income, or £785,000 (net) that you may be unable to earn.

The policy can cover both the employed and the self-employed and for people who are the main wage earner in a household, this type of policy really shouldn't be overlooked.

Firstly, let's first re-cap on the main types of insurance;

Life Cover - this covers you in the event of your death. (see our Product Guide for further details).

Critical Illness Cover - this covers you in the vent of you suffering a serious illness, the list is fairly extensive however the main illnesses covered are; Cancer, Heart Attack and Stroke. (again, see our Product Guide for further details)

Income Protection - is designed to pay out a monthly income if you are unable to work due to an illness. Unlike Critical Illness policies, Income Protection policies are designed to pay out with any illness, whereas the Critical Illness payment is based you being diagnosed with a pre-determined serious illness.

The plan can help towards mortgage/rent payments, cover household bills, or help maintain your lifestyle

The two main causes of absenteeism with the UK are; Stress of back related issues. These would both be covered on an Income Protection Policy.

Main Options

Sum Assured - this is quite simply the amount of money you wish to provide each month. Most providers will typically allow you to cover around 60% of your gross annual income.

Term - this is the number of years that you wish the policy to run for and is typically linked to a retirement age. One thing to be aware of is that certain professions will only allow cover up to certain ages.

Deferred Period - A deferred period is how long before the policy would pay out. This can range from 1 month to 12 months. Typically the deferred period would coincide with any employer benefits that you have. If you don't have employer sick pay (other than Statutory), then the term that you select would depend on your dependence on your income.

Other options;

Guaranteed Premiums - in order for you to budget you can request that premiums are Guaranteed and therefore they will remain level throughout unless you have a policy that is scheduled to rise annually

Inflation Linked - one of the reasons your premiums may increase is if you have asked for the Sum Assured to increase annually in line with inflation. That way you can potentially safeguard the policy to ensure it covers rising living costs. It is important to factor in that premiums also rise each year.

Age Banded Premiums - another reason why a policy may increase each year is if the provider automatically

Short term payment options - these are often low cost options whereby the maximum payment period for the policy would be 2 or 5 years.

Occupation Class - this is usually split into 2 types; own occupation and any occupation. The own occupation class is a more comprehensive policy as it covers your ability to be able to perform your own/current profession. The any occupation is less broad and covers your ability to work in any profession.

For example; If an Airline Pilot had an Any Occupation policy they may feasibly be unable to do their own job due to their health, however they could potentially work in an office. A policy like this may force someone into another role, whereas selecting own occupation gives you the choice not to do so.

As you can see there are many different things to consider and it is crucial that you get Independent Advice to confirm which option, if any, is most suitable for you.

Why not contact us for a chat on how we might be able to help.


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