I can see that some plans seem to base the amount of Income Protection cover on earnings, often as a percentage of income. What is the maximum level of cover I can take out?
The answer to this question really depends on what type of Income Protection policy you are referring to.
With short-term plans (paying out for up to 12 months), the vast majority will allow you to cover a maximum of 65% of gross (pre-tax) income. However, although uncommon, some short-term plans have started to allow up to 70% of earnings to be covered.
For long-term protection plans (which can pay out until retirement) it is still possible to cover up to 65% of gross earnings with a limited number of insurers. However, the maximum level of cover with a large number of insurers in this market is 55% of gross earnings.
Thus, in order to allow all Income Protection insurers to provide competing quotes the amount of cover should be set at a limit of 50-55 percent of pre-tax earnings, although you can go higher if you really need the extra cover.
Do you need the maximum level of cover?
Given the income limit many insurers impose it is natural to start looking at the maximum amount of cover that can be taken out but it is often better to really think about how much cover you actually need.
For example, if your expenses are £1,500 per month do you really need to pay the extra premium for £2,000 worth of cover? In most cases, it is better to think about how much income insurance cover you need in terms of monthly outgoings, rather than income.
If you work through your own limited company you may be able to take out Executive Income Protection which will allow you to cover up to 80% of your income.
It is important to note that these director plans are owned and paid for by your business, should a claim arise the payments would be made to the business who would then need to distribute the funds to the individual as income which would be taxed accordingly.
If you are considering taking out Income Protection and would like some help please do not hesitate to pop us a call or email email@example.com.
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