Obtaining adequate protection insurance is an important part of preserving your lifestyle and preparing against misfortune. The right or the wrong kind of insurance cover can make a significant difference in a time of need.
Traditional Income Protection and Payment Protection Insurance (PPI) are often confused – they may sound similar, but there are a lot of noteworthy differences between the two.
PPI is used to cover your outgoings, typically expenditure on a loan. Income Protection, on the other hand, is designed to protect your wider income. This can include expenditure on loans but also wider costs, such as a mortgage, rent, bills and lifestyle costs.
There are multiple differences between Income Protection and Payment Protection, notably surrounding:
Protect up to 70% of your income if you can’t work due to accident or sickness (and potentially redundancy depending on your policy)
Payment Protection cover tends to be aligned with an outstanding loan or mortgage, so the amount you can insure yourself for is linked to the size of your monthly loan repayments
How long will the policy cover me for?
Although short-term cover is available, Income Protection allows you to choose long-term protection, which means the policy will pay out right up until the policy cease age (usually your retirement age).
Payment Protection Insurance will only ever offer short-term, temporary cover for your mortgage payments for a maximum of 12 months, although some that pay out for 24 months are available.
Will I be covered if I can’t do my job?
Own Occupation insurance is the most comprehensive cover, protecting you in the event of you being unable to do your specific job. Inferior definitions of incapacity, such as suited occupation, may only pay out if you can’t do another job suited to your experience and education.
PPI plans usually only provide suited occupation cover, so the insurer is entitled to ask you to do another job given your skillset before permitting a claim. Some PPI policies even offer any occupation cover, where the insurer is entitled to check your ability to do any job before allowing a claim.
How much can I insure myself for?
Usually between 50% and 65% of your gross monthly earnings as an individual, or up to 80% with Income Protection for Directors.
The amount of cover is linked to the monthly payments you make on a loan/mortgage, so usually much less than Income Protection.
What medical conditions are covered?
Full medical underwriting means your whole medical history is considered from the start, so you know what’s covered from the outset. Policies may even cover time off work due to certain medical conditions after a period without symptoms.
Usually has a long list of standard medical exclusions. There’s no upfront underwriting, so you may not be fully aware of what exactly you’re covered for. It’s unlikely any condition you’ve suffered in the past will ever be covered.
Which type of premiums are used?
Many people have the option to choose guaranteed premiums, which means your premiums will remain fixed for the life of your policy, regardless of you getting older or making any claims.
Often has reviewable premiums, which means the price of cover can go up year-on-year. Premiums may be increased due to issues such as economic turbulence or a spike in claims.
How much does it cost?
Income Protection Insurance
Payment Protection Insurance
Will the insurer pay my claim?
Insurers regularly publish their claims data for Income Protection – you can check out the claims statistics from the last three years here. These show the top five insurers by claims payout rate paid out over 94% of all Income Protection claims.
Providers rarely publish claims data, making it hard to tell which PPI provider is best at paying claims. Note that as PPI often uses a lesser definition of incapacity, it’s sometimes harder to claim on PPI policies than on own occupation Income Protection.
It’s impossible to tell whether you need Payment Protection Insurance or Income Protection without examining your circumstances. For that you’d need to pick up the phone and have a chat – feel free to pop us a call any time.
However, broadly speaking, if affordability is not an issue then every working adult should consider traditional long-term income protection which would pay a claim should they be unable to do their own occupation due to any illness or injury.
Income Protection is a broader, more comprehensive cover than PPI in many cases. Income Protection covers you for longer and for a larger amounts, as well as taking your medical history into account.
With Income Protection, there’s also the option for guaranteed premiums, where you lock in the cost of cover over the life of the policy from the start.
Payment Protection Insurance offers shorter-term cover where the maximum payout will often be limited to either 12 or 24 months depending on the terms of your policy.
No medical history will be taken with PPI when you set-up your cover which means a pre-existing medical condition that stops you being able to make your loan repayments may be excluded without you being clear on this until you come to make a claim. Most Payment Protection policies exclude any illness which you have suffered in the 2 years prior to taking out cover.
The major thing to consider with PPI is that premiums are often reviewable, which means they can jump throughout the policy with no preset formula.
When you consider the greater depth and breadth of what Income Protection offers, it’s perhaps not surprising that it can work out slightly more expensive than PPI.
However, factoring in that the cover can be significantly more comprehensive and you can lock in the cost with guaranteed premiums it’s worth spending a little extra to ensure your income is suitably protected.
Many people looking for unemployment cover find that it can be included in a PPI policy and feel it’s just easier to take out one policy covering all three risks. However, with some Income Protection policies it is possible to add redundancy cover as a bolt on to the accident and sickness cover.
We often couple 12 months of unemployment cover with a traditional long term income protection policy so our clients have the best of both worlds. Our advisers can discuss your needs with you and find you the right type of cover for your circumstances to make sure you’ve got the right insurance in place.
Income Protection for the self-employed is no issue when looking to cover accident and sickness, but always be careful if deciding to add unemployment cover to your policy. That’s because when you work for yourself you’re technically you’re own boss.
As such, it’s very hard to prove that your out of work through no fault of your own and had no knowledge about the chain of events leading to the claim.
While Income Protection provides more comprehensive cover, there’s no guarantee that it’s right for everyone. If you’re not looking to protect your income and are only worried about loan repayments, then a full Income Protection plan may not make sense.
As much as we would like to see every working adult have their income protected right up to retirement some cover is still better than no cover at all.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.
If you’re deciding whether to take out Payment Protection Insurance or Income Protection then please feel free to call us on 01273646484.
Our advisers are on hand to talk you through your options and make sure you find the best policy for your circumstances that covers all of your requirements.
Director at Drewberry