Income Protection is a hugely valuable protection that’s designed to pay out if anything medically prevents you from doing your job.
It’s there in case accident or sickness keeps you out of the workforce, allowing you to maintain essential monthly expenditure while you’re recovering.
While it may sound simple – at its core it’s an insurance product that pays out a replacement income if anything medically stops you from working – there are a number of options to choose from when you set up a policy that can have a significant impact on the cost of cover.
Craig’s case below is that of a 40 year old office based worker who is a non-smoker. Naturally, the premiums would be higher for someone who is older, in a more risky occupation and who smokes.
Meet Craig. He’s a healthy 40-year-old employee earning a gross figure of £50,000 per year.
The starting premium is for a policy covering £2,000 per month.
The policy will start paying out after 4 weeks and could continue paying out right up until the age of 68 – a 40-year-old man’s state pension age – if Craig was too ill or injured to ever return to work.
The premium of £87.95 per month is also guaranteed to never to change over the life of the policy.
Starting Premium :: £87.95 per month
It is very common for people to try and cover as much as possible so the amount they would receive from the policy is as close as their current net pay.
However, it’s important to realise that Income Protection is for a worst case scenario and therefore it makes sense just to cover the essential payments that would need to be made each month, such as mortgage payments, food costs, utility bills and council tax.
In this example, lowering the level of cover from £2,000 per month to £1,500 per month has lowered the monthly premiums by 24%, from £87.95 to £69.11 per month.
Resulting Premium :: £69.11 per month
It is also very common for people to automatically select a deferred period of 4 weeks (i.e. the policy starts paying out after 4 weeks).
However, longer deferral periods can make a significant difference to the price of a policy, so think about any savings you could live on or period of sick pay you might receive from your employer. Then consider increasing your deferral period in line with these safety nets.
In this example, increasing the deferral period from 4 weeks to 13 weeks slashes the cost by 43.9%!
Resulting Premium :: £38.80 per month
While the state pension age has increased – for Craig as a 40-year-old man it’s now 68, up from 65 – many of us have sufficient retirement provisions in the form of pensions and other investments that we could afford to retire slightly earlier than state pension age.
As such, it’s often possible to reduce the policy cease age to below your state pension age to an age at which you think you’ll be able to afford to retire.
This will make Income Protection cheaper because the risk of illness or injury increases notably after the age of 60, so reducing the cease age cuts out some of that risk to the insurer.
For instance, reducing the cease age to 65, the old state pension age, cuts premiums by 9%.
If you can afford to reduce it even further, say to 60, premiums fall by over a third, to £25.84.
Resulting Premium :: £25.84
Only consider reducing your policy cease age if you think you’ll realistically be able to retire at that point and start relying on pensions etc. to fund day-to-day living. Otherwise, your Income Protection will stop prematurely without you having sufficient funds to live on.
Independent Protection Expert at Drewberry
The options above were for a policy that doesn’t limit how long the plan could pay out for (i.e. it could pay out right up until the age of 68 if the policyholder wasn’t well enough to return to work).
However, it is possible to choose an option with a maximum payout length of 5 years.
Although multiple claims of 5 years can usually be made for different medical conditions it does mean the insurer would cut off the benefit after 5 years of claiming for the same condition.
For this reason the insurer can afford to lower the premium, which amounts to a reduction of 10.3% in this example.
Resulting Premium :: £24.81 per month
If you’re truly looking for budget Income Protection, limiting your payout period may be the way to go.
However, given that figures from the leading insurers show that the average claim length is around 7 years, you have to ask yourself if a 5 year payment period would be enough, especially as it only offers minimal reduction in premiums compared to some of the other reductions listed above.
Independent Protection Expert at Drewberry
Opting for age-banded premiums is cheaper than guaranteed premiums initially, in this case taking premiums down to £16.09.
It’s worth noting that although age-banded premiums are cheaper initially, insurers will increase premiums each year in line with your age.
These increases will be laid out in your policy documents and will be solely related to your age; the insurer cannot increase them for any other reason unless you yourself adjust the terms of the policy.
However, there may come a point during the lifetime of the policy where they crossover and become more expensive than guaranteed premiums and keep rising annually.
Final Premium :: £16.09 per month
According to Which?, Income Protection is the one product that every working adult should consider.
Of course, it’s understandable that not everyone can afford the most comprehensive cover with all the bells and whistles, which is why we’ve created this guide to show you how it’s possible to make cover far more affordable.
Independent Protection Expert
Getting Income Protection in place is a key way to protect you and your loved ones if you find yourself unable to earn an income. We tend to insure our homes, cars and pets but neglect ourselves, the one who pays for all these things in the first place!
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.
Taking out Income Protection can be a bit of a minefield with lots of options to consider and a few pitfalls to avoid.
If you need any help please don’t hesitate to pop us a call on 02084327333 or email firstname.lastname@example.org.
Director at Drewberry