How Does Income Protection Work?
There are four major policy factors that will determine the cost of cover:
- Level of cover
Also known as the sum assured, this reflects how much income you’ll need from the policy each month. You can insure between 50% and 70% of your gross earnings. The more you insure the more your insurance will cost, so consider only covering the essentials rather than simply going for the maximum.
- Length of deferral period
How long you can wait before you need the cover to kick in. Similar to a car insurance excess in that the higher the excess the lower the premium, with Income Protection the longer you can wait the cheaper cover will be. People typically set this to match any sick pay you might receive or savings you could rely on.
- Policy cease age
How long your cover will last – this is typically set to match your retirement age. Although many policies will offer a payout all the way up to age 70, this will notably increase the cost compared to a policy that ends at age 65 or even 60, so think carefully about your cease age.
- Payout period
This refers to the length of time you’ll receive a benefit for in the event of a claim. Cheaper, short-term policies will only pay out for a maximum of 1, 2 or 5 years per claim, which may not be sufficient if you suffer a long-term disability. The best disability insurance will pay out long-term with no limits, right up until retirement if necessary because you can never work again.
Choosing Your Premiums
When you take out a policy you have three options to pay for cover. These premiums will impact the cost of your Disability Insurance over time, so it’s important to consider each carefully to decide which is right for you.
- Reviewable premiums
The insurer can increase these premiums as they see fit, whether this be as a result of poor underlying economic factors or a spike in claims in any given year. While these premiums tend to work out cheaper at the start, because they can jump unpredictably over time they tend to work out more expensive when you hold the policy long-term.
- Age banded premiums
These premiums also increase with time but, unlike reviewable premiums, they only do so by a set figure each year. This will be laid out clearly in the policy documents and simply reflects the increased risk of you claiming as you age. These tend to work out cheaper at the start but, as they rise with time, also may work out more expensive over the life of the policy depending on your circumstances.
- Guaranteed premiums
Guaranteed for the life of the policy, these can’t change with time. If you take out a long-term policy when you’re young and healthy, when premiums are usually at their cheapest, guaranteed premiums will typically work out the most cost-effective (again depending on your circumstances) as they cannot rise over time.
Which Definition of Incapacity?
There are three definitions of incapacity to consider when taking out cover. Each one will impact whether you can claim, determining the level of disability you need to suffer before you can receive benefits.
Own Occupation Cover
Arguably the best definition of incapacity, this will allow you to make a claim if you’re unable to do your specific job due to a disability.
So, for instance, a surgeon with a hand injury wouldn’t be able to perform surgeries and so would generally be able to make an Income Protection claim due to disability.
Suited Occupation Cover
Suited occupation Income Protection means you’ll only be able to make a successful claim if you become so incapacitated you can’t perform your job or any other that you have the skills and experience to perform.
This may mean a surgeon with a hand injury couldn’t perform surgeries but could face not being able to make a successful claim because they have the skills and experience to teach medicine, for instance.
Any Occupation / Work Tasks
This is the most difficult definition of incapacity to claim on and in general we recommend most clients avoid it.
It means you can only make a successful Income Protection Insurance claim if you become so disabled you cannot work in any job / perform a set number of tasks required by most professions, such as typing or signing your name.
Making A Claim
- Step 1 :: You encounter a health problem that prevents you from working and take leave to recover.
- Step 2 :: Contact your policy provider to make a claim. You’ll typically need evidence of your incapacity in the form of a doctor’s note or other information from a consultant.
- Step 3 :: Once your provider has approved your claim, your deferred period will begin. During this time you won’t receive a benefit, but may be receiving sick pay benefits from your employer.
- Step 4 :: If, by the end of your deferred period, you are still not well enough to return to work, your insurer will begin providing you with monthly income. These benefits are usually transferred electronically into your bank account each month.
- Step 5 :: You can continue receiving benefits if you need them until you have recovered, come to the end of your claims limit, or reached your policy’s cease age.
- Step 6 :: Once you reach your policy’s cease age, your policy will end.
The income that you receive when claiming on your policy depends on your salary before you took leave. You are typically able to insure up to 70% of your gross monthly earnings (the sum before income tax is deducted) and the policy can last all the way up until your planned retirement.
Neil’s Cancer Claim with British Friendly
Neil is a client of Drewberry’s and we matched him with British Friendly for his Income Protection Insurance. He’d held the policy for just 4 years before unfortunately needing to make a claim.
After a bout of stomach pains took him to his GP, and his GP sent him off for further tests, Neil got the terrible news that he had stage 2 bowel cancer and needed surgery.
While the surgery was a success, Neil contracted post-operative sepsis and needed several weeks of hospital care. During this time, and his subsequent recovery at home, he was completely unable to work.
British Friendly paid a claim all the while Neil was unable to work, allowing him to keep up with all of his important bills, including his mortgage.
🤕 Read More About Neil’s Claim
Other Client’s Sickness Insurance Claims
The below table contains five examples of claims from Income Protection clients who have all needed to claim on their policy.
The information is from Liverpool Victoria’s claims history, it demonstrates how anyone can lose their income, regardless of age, gender or occupation, LV’s youngest claimant was just 22 years old.