The cover that's most often overlooked
Income protection pays you a regular monthly income if illness or injury stops you working. Unlike a lump sum policy, it keeps paying — often until you're well enough to return, or until the end of the policy term.
It's worth asking which you feel more exposed to: dying in the next ten years, or being signed off work for six months. Many people insure the first and not the second.
The main things to understand
The amount
Policies typically replace a proportion of your gross earnings rather than all of it — commonly somewhere around half to two thirds, depending on the insurer.
The benefit is usually paid free of tax under current rules.
The deferred period
This is how long you wait after being unable to work before payments begin.
You choose it at the outset — anywhere from a few weeks to a year. If your employer pays sick pay for three months, setting the deferred period to match can avoid paying for cover you won't use.
A longer wait generally means a lower premium.
The benefit period
Short-term policies pay for a set number of years per claim, which keeps the cost down.
Full-term policies keep paying until you recover or reach the end of the policy, providing more extensive protection.
How "unable to work" is defined
This is one of the most important terms in the policy. The definition used can make a significant difference to whether a claim is paid.
Own occupation
Pays out if you can't do your own job. It's generally the stronger of the definitions.
Suited occupation
Pays out only if you can't do a job you're considered suited to by your training and experience.
Any occupation
In the weakest version, cover may only pay if you're unable to carry out any job at all.
Check the definition before you commit
We'll tell you which definition applies before you commit to anything, so you understand exactly what the policy is designed to cover.
When your income depends on you
There's often no sick pay or death-in-service benefit behind you. If you're self-employed, being unable to work can have an immediate effect on both your personal income and your wider finances.
Income protection is usually one of the first things we'd look at, and cover can often be based on your drawings or profits, depending on your circumstances and the insurer's rules.
Think about the income gap
If you couldn't work for six months, how much of your normal household income would continue — and how much would stop?
What affects the premium?
Several things are taken into account when working out the cost of income protection. The main factors include:
Age
Your age when you take the policy out can affect the premium you'll pay.
Occupation
Manual and higher-risk occupations can cost more to insure.
Health
Your health and medical history can affect both the availability and cost of cover.
Smoking
Whether you smoke is one of the factors considered when calculating the premium.
Amount of cover
The monthly benefit you choose will affect how much you pay for the policy.
Deferred period
A longer waiting period before benefits start will generally reduce the premium.
Pre-existing conditions and exclusions
Pre-existing conditions and certain hazardous activities are commonly excluded or subject to specific terms. We'll explain any exclusions that apply to your policy before you proceed.
What happens if you can't work?
State benefits may be available if illness or injury prevents you from working, but they could fall well short of your current income.
Your employer may also provide sick pay, but the amount and length of time it lasts varies considerably. It's worth understanding exactly what would happen to your income before deciding how much protection you need.
Work out your real income gap
Look at your mortgage, household bills, food, childcare and other regular commitments. Then compare them with the income you'd actually receive if you couldn't work.
Think about the long term
This is long-term cover with long-term implications. Stop paying and you generally lose the protection.
The amount of cover needs to make sense against a future estate value, not just today's.
And where inheritance tax is a consideration, it should be looked at alongside your wider arrangements.
Getting it right
Income protection is about protecting the income that pays for everything else. The right level of cover depends on your circumstances, your employer benefits, your occupation and how long you could manage without your normal earnings.
Speak to one of our advisers and we'll build it around your circumstances.
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