Income Protection
Income Protection (IP) is designed to replace your
income if you are unable to work due to accident or sickness. A successful claim
will help you meet your monthly financial commitments, even if you are off work,
by paying you up to 50% of your gross earned income 
.
How does it work?
I’m employed
If you are an employee and you fall ill, your employer might pay you your full
pay for a few weeks or months. By law, an employer must pay most employees
statutory sick pay for up to 28 weeks, though this will probably be a lot less
than your full earnings. After that, you would probably have to rely on
state benefits.
However, some employers arrange group income protection insurance for their
employees as a perk of their job, which can pay out an income after the
statutory sick period. So check what you are entitled to.
I’m self employed
If you are self-employed, you won't have group income protection insurance as an option so you will need to make your own arrangements.
It won’t happen to me
Hopefully you will never need to call on an insurance policy for your income,
however this short
film is a true story about a successful couple who were in the wrong place at the wrong time.
Did you know?
How much will it cost?
You pay a monthly premium throughout the term of the policy. Cost depends mainly
on:
- Your age – at the time you start the policy.
Older people are more likely to suffer an illness, so pay more.
- Your sex – gender can have an affect on the
premium you pay.
- 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 job – 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. The longer the waiting period, the less you pay.
- Access - If your health is poor or your lifestyle
is considered risky, you may be refused cover or have to pay more than normal.
How much cover do I need?
- Check whether you already have protection in place in case you get
incapacitated, and for how long that protection would last. For example your
employer may have an income protection scheme in place you can benefit from, or
you may have a payment protection insurance that covers your mortgage.
-
State benefits, what am I entitled to should I become incapacitated?
- How much would I need to cover my monthly bills, less any state benefits if my income stops?
Example
The following example may help you decide the level of cover you need.
Sue is single and earns £26,000 a year before tax and other deductions. She
estimates that, if she was ill for a long time, her budget would be affected as
shown in the table below.
|
Sue's budget calculations in the event that she couldn't work
|
Her estimates
|
Income she would lose
Her take-home pay
|
£18,000
|
Deduct income she would gain
Approximate long-term incapacity benefit
|
£4,000
|
Deduct expenses Sue would save
Work-related costs, mortgage interest payments if covered by mortgage payment protection insurance
|
£3,000
|
Add extra expenses she would pay
Allowance for, say, cost of special equipment or treatment, cost of heating her home for more time
|
£2,000
|
|
EXTRA INCOME NEEDED
|
£13,000
|
- Sue also works out that as a perk of her job, her employer will pay her half a
salary for 52 weeks after the statutory sick pay period of 28 weeks. She
therefore arranges for her policy to pay out after 80 weeks of incapacity (see
waiting period above).
You may have considered critical illness cover (CIC) – which pays out a tax-free
lump sum if you are diagnosed with a life-threatening condition listed in the
policy – as an alternative to income protection insurance. But there are lots of
common situations when CIC would not pay out – for example, if you had back
problems or a stress-related illness.