What is Disability Insurance? How Much Does It Cost?

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18-02-2021

Disability Insurance protects you financially if you’re unable to work. You’ll receive a monthly benefit equivalent to a proportion of your gross salary to replace lost earnings if an illness, injury or disability prevents you from undertaking your current occupation.

This lets you keep up with your essential monthly expenditure, such as:

  • Mortgage / rent
  • Utilities
  • Council tax
  • Loan / credit card repayments
  • Childcare costs
  • Weekly grocery shop.

What Does It Cover?

It protects against all kinds of short term conditions and long term disabilities, regardless of whether they result from illness or bodily injury.

Providing you didn’t have the condition before taking out protection, if your condition stops you working you can make a claim.

Does It Cover Pre-Existing Conditions?

When you apply for cover, the insurer will ask you a series of medical questions. These will relate particularly to your health over the last 5 years. If you declare any medical conditions, the insurer may:

  • Cover the condition on standard terms (so you won’t face any increased premiums or terms different from those of a healthy individual)
  • Cover the condition for an additional premium
  • Exclude the condition but offer a date at which it will consider reviewing the exclusion
  • Exclude that condition entirely (perhaps with a premium discount to compensate).
EXPERT TIP 🤓
Have pre-existing medical conditions? We have direct access to the underwriters at all the major UK insurers and can negotiate the best terms given your circumstances.

Are There Any Exclusions?

Yes, most insurers have a few blanket exclusions that apply to everyone. Exclusions often include disabilities sustained:

  • In the course of criminal activity
  • From illegal / illicit drug use, substance abuse or alcohol misuse
  • During foreign travel to areas of active internal conflict, high terrorism risk, political instability or countries the Foreign and Commonwealth Office (FCO) has advised against visiting.

Other than the above, Disability Cover has few standard exclusions. Instead, your insurer decides what your policy will and won’t cover you for based on your medical history.

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Do I Need It?

How would you cope if you developed an illness or injury that meant you couldn’t work? Especially if that condition was long-term, preventing you from working ever again?

Sadly, the chances of this are higher than many people assume.

What’s the Risk of Disability?

1 in 6 working adults aged 55+ said they had needed to take at least 6 months off work due to illness or injury at some point in their careers.

Illnesses requiring over 6 months off work clearly go beyond your usual coughs and colds, or even broken arms or legs. They’re more serious disabilities that stop people working for months.

Meanwhile, the Office for National Statistics revealed that 2.16 million people were ‘economically inactive’ (i.e. not seeking work) due to long term disability in the 3 months to August 2020.

EXPERT OPINION 🧐
That’s why, according to consumer group Which?, Income Protection is the one policy every working adult should consider.

This was certainly at the forefront of Mrs Mummypenny’s mind. Here’s why this self employed personal finance blogger took out Income Protection.

What About Other Safety Nets?

Some people assume they’d be able to rely on other means — such as savings, company sick pay or state benefits — to support themselves if they fell ill. However, consider whether:

  • You could survive on your savings for more than a few weeks if you couldn’t work
  • Your employer offers full sick pay for a lengthy period or simply provides the bare legal minimum — Statutory Sick Pay (SSP) at £95.85 per week for 28 weeks?
  • You could survive on Employment and Support Allowance (ESA), one of the main state benefits for disabled adults, which starts at £74.35 per week for over-25s depending on the nature of your disability.

Many people would struggle if they had to rely on savings. 2 in 5 Brits have no more than £1,000 stashed away for a rainy day.

Given average household expenditure is close to £600 per week, £1,000 in savings would keep the average family afloat for less than a fortnight if a breadwinner couldn’t work.

Also, state benefits aren’t as generous as many people assume.

With ESA starting at just £74.35 per week if you’re over 25, most people would face a big drop in their income if they were ever off work for any length of time.

While you may get more depending on how serious your disability is, and you may also be entitled to other state benefits, these rarely make up fully for lost earnings.

How Much Does Disability Insurance Cost?

Insurers look at both your personal circumstances and the level of cover you require to calculate the cost of your plan. To calculate your premiums, they’ll look at your:

  • Age
    The older we get, the higher the risk of developing a disability, illness or injury. As a result, the older you are the more cover costs.
  • Health / Medical History
    Insurers may increase your premiums if you have a pre-existing condition or simply exclude that condition outright.
  • Smoker Status
    Smokers are more likely to become ill, and with more serious conditions, than non-smokers. Most, although not all, insurers therefore charge smokers more for protection.
  • Occupation
    Some jobs are riskier than others and insurers charge more in premiums as a result. For example, manual workers have a higher risk of workplace injuries than office workers.

    Moreover, you’re more likely to be unable to do a manual job following an illness / injury due to the physical nature of the job. Insures are therefore generally more likely to pay a claim to manual workers, another reason premiums tend to be more expensive if you’re in a manual role.

Example Quotes

In the below table, we’ve calculated quotes to give an example of average monthly cost of cover. To provide these quotes, we’ve assumed the individual is:

  • In good health
  • Employed as an office worker
  • Seeking a benefit of £2,000 a month
  • Looking for an 8 week deferral period
  • Going to retire at age 65
  • Looking for long term cover that will pay out until retirement if they can never work again.

To compare premiums, we used our online cost calculator to compare the leading UK insurers. They premiums below represent the cheapest policy that matches the above criteria from the entire UK market.

Age

🚭
🚬

25

£31.84
per month

£44.94
per month

35

£47.82
per month

£65.74
per month

45

£77.84
per month

£104.48
per month

Policy Factors Affecting The Price Of Cover

You also have to make some choices about your policy when you take out cover. These impact the cost of cover as well.

Monthly Payout / Sum Assured

The sum assured is technical jargon for how much you’ll get as a benefit each month if you make a claim. You can protect between 50% and 70% of gross (pre-tax) earnings depending on the provider you choose.

The higher the benefit, the more expensive your premiums.

Payout Period

You have two options when you buy Disability Insurance:

  • Long term cover
    Pays out each month until retirement if you develop a disability so severe you can never work again
  • Short term cover
    Pays out for up to 1, 2 or 5 years per claim depending on your policy. While short term protection lasts until you retire, so you can claim for different conditions over the policy’s life, the insurer stops paying out for any one claim after a set period, even if you’re still too ill to work.

Long term cover is the more comprehensive option. It could potentially pay out for years or even decades if you develop a disability so severe you can’t ever do your job again. For this reason, we tend to recommend it over short term policies.

However, if your budget won’t stretch to long term protection, short term cover is far better than no policy at all.

Your Deferral Period

You choose the policy’s waiting period (known as the deferral period) when you take out cover.

This is the length of time between you being signed off sick and the insurer paying out. For example, an 8 week deferral period means the insurer starts paying out after 8 weeks off sick.

You usually align your deferral period with how long you could last on savings, or how long your company offers full sick pay. Once your savings or sick pay run out, the policy kicks in to cover your lost earnings.

The longer your deferral period, the cheaper your policy.

Cease Age

Your cease age is how old you’ll be when the policy comes to and end. You usually this with your expected retirement age.

With long term Disability Insurance, the cease age is the age at which the policy stops paying out if you ever develop a disability that means you can never work again.

Many insurers offer a cease age of all the way up to 70. However, this will notably push up the price of cover over a cease age of 60 or 65 because the higher your cease age the more your premiums cost.

Type of Premiums

When you take out cover there are two types of premiums to consider:

  • Age-banded premiums
    These premiums rise annually by a set amount laid out in your policy documents. The increase is solely linked with the fact that, as we get older, there’s a higher risk of a claim.
  • Guaranteed premiums
    Fixed for the life of the policy, these can’t change with time unless you alter your cover. If you buy long term Disability Insurance when you’re young and healthy, when premiums are usually the cheapest, guaranteed premiums typically work out more cost-effective as they don’t rise with time.

However, guaranteed premiums are the most expensive option. Moreover, they’re not be suitable for everyone. For example, manual workers often get better rates with age-banded premiums. It’s therefore best not to discount anything until you’ve examined all your options.

IMPORTANT NOTICE ⚠️
Beware reviewable premiums. Some inferior policies (for example Payment Protection Insurance or PPI) use these premiums. Here, the insurer can increase your premiums as it sees fit for any reason, such as if it experiences a spike in claims one year.

How Do I Make a Claim?

If you take out a policy and develop a disability, the following steps offer a basic outline of how to claim:

  • You develop a health problem that prevents you working.
  • Contact your insurer as soon as you stop working.
  • Fill in a claims form. Most insurers let you do this online. Also expect to offer evidence of your disability, for example a doctor’s note or diagnosis from a consultant.
  • Your claim is approved during your deferred period.
  • At the end of your deferral period, if you still aren’t well enough to work, your insurer starts paying your agreed monthly benefit.
  • You receive this benefit until you recover and return to work, reach your claims limit (for short term protection), or hit your policy’s cease age.

Neil’s Cancer Claim with British Friendly

Neil is a Drewberry client. We advised him on a British Friendly Income Protection Insurance policy. He had the policy for just 4 years before unfortunately needing to claim.

After a visit to his GP due to a bout of stomach pains, Neil’s GP sent him for tests. The tests revealed the terrible news that Neil had stage 2 bowel cancer and required surgery.

Fortunately the surgery was successful; however, Neil contracted post-operative sepsis. This required 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 while Neil couldn’t do his job. This let him keep up with all of his bills, most importantly his mortgage.

🤕 Read More About Neil’s Claim

Which Insurers Pay the Most Claims?

It’s understandable to want to pick an insurer who you can trust to pay out should you need to claim.

Payout rates across the industry are not only higher than many people assume but are also fairly uniform.

For example, as shown in the table below, most insurers pay more than 90% of all Disability Insurance claims they receive.

Insurer

2017

2018

2019

Aegon

92.1%

93%

100%

Zurich

87%

95%

98%

Vitality

96%

97.8%

96.4%

Shepherds Friendly

96%

95.8%

96.3%

Cirencester Friendly

94.7%

95.2%

95.7%

Holloway Friendly

96%

98%

94%

British Friendly

92.4%

94.7%

94%

Liverpool Victoria

96%

95%

93%

The Exeter

91%

93%

91%

Aviva

88.8%

86.3%

85.7%

Legal & General

95%

95%

82%

Payout statistics alone should not be used to decide which insurer offers the best Income Protection.

Instead, payout rates should be used as a rough guide to compare successful claims across the industry as a whole.

Who Are The Top UK Disability Insurance Companies

Most of the leading UK insurers have a traditional long term income protection product.

Where each has their own pricing and underwriting philosophy it is important you research and compare quotes across the market to find the most cost-effective solution given your circumstances.

Our online cost calculator makes life easy, enabling you to instantly compare pricing from all of the following insurers 😎

Doing thorough research is even more important if you have existing health conditions, work in a high risk occupation, are self employed or run your own company.

There are some smaller providers who focus on specific niches which you might not come across unless you speak to an expert adviser. If you need help doing your research give us a call on 02084327333 or email help@drewberry.co.uk.

Additional Benefits

Another important area of comparison is the additional benefits on offer from various insurers. These are services available, almost always for free, alongside Disability Insurance.

Insurers offer these benefits with your wellness in mind. They’re there to help reduce the chances of you needing to claim or to speed up your recovery if you do fall ill.

Depending on your insurer, additional benefits may include:

  • Remote GP appointments
  • Medical helplines, offering convenient telephone access to trained doctors and nurses for advice on minor medical ailments
  • A fixed number of physiotherapy sessions per year (either online or in person)
  • A fixed number of counselling / cognitive behavioural therapy sessions per year (either online or in person)
  • High street discounts
  • Discounts on gym memberships / fitness trackers
  • Hospitalisation benefit, paying out a cash benefit each day you spend as an inpatient in hospital
  • Second medical opinion service, providing access to world-leading medical experts to offer a second opinion on a diagnosis or course of treatment.

Many such services are available not only to you as the policyholder but also your immediate family, such as your spouse / civil partner or dependent children.

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Frequently Asked Questions...

  • Is Disability Insurance The Same As Income Protection?

    Yes, Disability Insurance is another term for Income Protection.

    Effectively, they are the same product.

  • Does It Cover Permanent Long Term Disability?

    If you choose long term protection, the answer is yes. Traditional long term protection covers permanent disability.

    With this protection, if you become permanently disabled your plan continues paying out until you retire. At that point, you usually get access to other income, such as the state pension.

  • Can I Get Disability Insurance If I'm Self Employed?

    Yes, self-employed workers can get Disability Insurance. It doesn’t matter whether you’re a company director, a sole trader or an employee of your own limited company.

    In fact, given self employed people don’t get sick leave and aren’t entitled to Statutory Sick Pay, it may be even more important for them than for employed people.

    Providing you’re working more than 16 hours per week and can prove your earnings, you’re eligible for cover.

  • How Does HMRC Tax A Claim?

    If you buy cover personally, you pay premiums with net income (i.e. your earnings after HMRC has already taken tax and National Insurance contributions from).

    Given you’ve already paid tax on the funds you use to pay premiums, the payout is typically tax free.

    Company-Paid Schemes

    However, if you’re enrolled in a workplace Group Income Protection scheme your employer pays for, or you opt for Executive Income Protection, the answer is slightly different.

    If a business is paying premiums on your behalf, the premiums can be eligible for corporation tax relief for the company.

    This means benefits are therefore taxable. In the event of a claim, the insurer pays the benefit to your employer. Your employer then distributes it to you as it would your wages. HMRC taxes it as income at this point.

  • Is It A Taxable P11D Benefit In Kind?

    No, our understanding is that HMRC does not consider Disability Insurance a P11D / benefit in kind.

    P11D benefits are those which employers pay for on your behalf and you must pay additional tax on.

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Compare Disability Insurance Quotes & Get Expert Advice

With so much to consider when it comes to setting up Disability Insurance, it’s important that you don’t miss anything out.

Our experts our on hand to ensure you get the most cost-effective cover given your circumstances.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

If you are looking to set-up disability cover or review an existing policy give us a call on 02084327333 or email help@drewberry.co.uk.

I’ve held a policy with Drewberry for several years now. They are always friendly, insightful and offer great service.

Dan Pettitt
13/01/2021
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