As a self employed worker with little entitlement to government support and a young family Mrs Mummypenny recognised the acute need to protect her income should she suffer an accident or sickness.
How Does Accident & Sickness Insurance Work?
When taking out a Sickness Insurance policy it is important to understand how the policy works and the factors that will determine how you set-up you plan.
There are a few questions you will need to answer to ensure you are buying the most suitable cover for your needs.
What Level Of Cover Do You Need?
When setting up your cover you need to define the monthly income you want to protect. This is the amount you would receive from the insurer if you claim. It’s also known as the ‘sum assured’.
Some insurers will allow you to protect up to 70% of your gross income. It is important not to rush in and just choose the maximum but instead add up your anticipated outgoings if you were out of work.
Some things such as meals out or travel expenses are likely to reduce considerably and might not need covering.
The more you cover, the higher your premiums will be.
How Long Should Your Cover Last?
Typically you would look to set up your policy to align with either your expected retirement age or the end of your mortgage.
It should be aligned to an age where you could rely on other assets or income such as your pension provisions should you still be unable to work when the policy ends.
On A Budget Or Can You Afford Long Term Cover?
A traditional long term policy would pay a claim right up until your policy cease age if you were unable to return to work.
For those with a tighter budget some insurers now offer short term products which will only pay a claim for a maximum of 2 years.
These are significantly cheaper and some cover is always better than none at all. However, choosing a budget policy you run the risk of a claim stopping after 2 years and having nowhere to turn if you are still out of work.
It is worth bearing in mind leading insurer LV= has an average Income Protection claim length of 7 years.
Setting An Appropriate Deferred Period
Your deferred period is the amount of time you are out of work before a claim will start being paid and it can make a huge difference to the cost of your policy.
If you receive any level of company sick pay or have significant savings you can extend your deferred to reduce your premiums.
Extending your deferred period from 4 weeks to 13 weeks can reduce your monthly premium by as much as 35%
Do You Need Indexation?
An often overlooked but very important option.
Choosing indexation ensures your level of cover rises each year with inflation. Should a claim arise an indexed policy will pay a claim that will have the same buying power in 20 years time as it does now.
Without indexation the buying power of your cover will be eroded every year.
A pint of milk cost a lot less 15 years ago than it does today and so if you are considering long term protection it is really important to consider indexing your policy.
Guaranteed, Age-Banded or Reviewable Premiums?
The premiums you choose can have a significant impact on the total cost of your policy. You have three different options to consider:
Guaranteed premiums are often the most expensive to start with but are fixed and won’t change. With Age-Banded premiums they will rise over time as set out in the policy terms.
Age-Banded are often initially cheaper but tend to become more expensive over the life of the policy.
With Reviewable premiums the insurer has the right to change monthly premiums over time. If they have a particularly bad claims experience or the market changes there is a risk that the monthly cost may become unaffordable as you get older.
How Much Does Sickness Insurance Cost?
The cost of Accident and Sickness Insurance will depend on a variety of factors, including:
- Your level of cover
The amount of income you’re looking to receive each month from the policy
- Your age
The older you are at the start of the policy, the higher the cost of Income Protection
- Policy cease age
The age at which you want the policy to end (usually your expected retirement age) will impact the cost of a policy, with an older cease age increasing premiums
- Any health conditions you may have
An insurer may look to increase the premiums if you have a health condition or simply exclude it outright
- Your smoker status
Smokers are more likely to get ill, and to become seriously ill, due to the detrimental health impacts of smoking
- Your deferral period
Similar to a car insurance excess, the deferred period reduces the cost of cover the longer you set it for.
Average Cost of Accident And Sickness Insurance In 2021
In the table below, we’ve calculated the cheapest monthly cost of a long term sickness insurance policy having compared the premiums from the top 10 UK insurers using our quote tool.
To work out the cost of Income Protection, we’ve assumed:
- The person is a healthy office worker
- They want a benefit of £1,500 a month
- They’re looking for an 8 week deferral period
- Their cease age will be age 65
- They’re looking for long-term cover
- They want guaranteed premiums for the life of the policy.
The premiums calculated below are the cheapest quotes for a comprehensive sickness insurance policy.
There are policy factors you can change including opting for short term cover and a longer deferred period if the cost of comprehensive cover sits outside your budget.
If you would like to work out the cost for your own cover based on your needs you can use our quote tool which compares all the leading UK insurers including Aviva, Vitality and Legal & General →