Answered by Tom Conner
This is a very common question. Many people often make the mistake of over-insuring by taking out two income insurance plans in order to try and cover 100 percent of earnings.
Why only a percentage of income can be covered:
The issue is that insurers will only allow you to receive a certain proportion of your pre-incapacity earnings whilst out of work. Essentially, insurers do not want you to be just as well-off out of work as when you were in work, so there is always an incentive to go back to work.
Why two policies cannot be taken out:
The title to this section is a little misleading, you can take out two plans but just as long as the total level of cover doesn’t go over the maximum allowable for each insurer.
At claim stage an insurer will ask if you have any continuing income either from your job or any other insurance policies. If you have continuing income the insurer would reduce your level of cover so that you are not receiving more than the maximum they allow.
As an example, if you had two plans covering 50% of income and both insurers would only allow you to cover a maximum of 50% of income then only one plan would payout, the first plan you took out. The premiums you paid for the second plan would effectively have been wasted.
On the other hand, if you had only insured 25% of salary with each insurer (resulting in total cover of 50% of income) then there would be no issues at all.
So, how much can be covered?
Around half of income protection insurers will allow you to cover a maximum of 50% of your gross (taxable) earnings; however this does depend on your level of earnings as some insurers will allow a higher proportion for lower incomes.
Other insurers will allow you to cover up to 65% of earnings but it just means that the choice of insurers is very limited. It is important to note that the benefit paid out by personal income protection is tax-free.
More Info: With Income Protection How Much Can I Cover?
My earnings are low and I pay little tax
For some people who earn a low level of income it will be the case that gross and net earnings are very similar (given the personal tax allowance).
This can cause issues gaining enough cover as nearly all insurers base the level of cover on gross rather than net salary and often leads people think about trying to take out two income protection policies.
If this applies to you please pop us a call as there are a very small number of plans that do not take earnings into account, just so long as you’re working more than 16 hours per week. The Bills & Things plan by The Exeter is one such example.
Frequently Asked Income Protection Insurance Questions
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