Why Long Term Income Protection?
Long term protection provides you with a monthly income if you cannot work due to accident or sickness.
Designed to cover your core monthly financial commitments such as your mortgage/rent, bills and food.
Income Protection is the one protection policy every working adult should consider. Which? Money 2013
Speak to our expert independent advisers or get an instant online quote to compare the UK’s leading insurers.
What does Income Protection cover?
Accident & Sickness
When the ‘Own Occupation’ definition of incapacity is used the policy can payout for any medical condition that prevents you from working in your own specific job role.
LV’s claims data in 2011 showed that the average claim length was 7 years long so it really does make sense to consider long-term protection rather than a short-term 12 or 24 month payout policy.
Some plans also have the option where the policy can payout should you suffer forced redundancy. The payout length for unemployment cover is usually 12 months long.
How does Income Insurance work?
You cease working due to accident, sickness or forced unemployment.
You make a claim with the your insurer, which may require completing a claims form and providing documents such as your GP note/redundancy letter.
The insurer will start to pay a monthly tax free benefit after you have been unable to work for the length of your deferred period.
The policy pays out until either you return to work or reach the maximum payout length, which could range from one year to retirement.
Do I need Long Term Protection?
When deciding if income protection insurance is worthwhile it makes sense to weigh up the risk of something happening and the potential consequences:
The Incapacity Risk:
1 in 10 people have been unable to work due to illness or injury for +6 months (The Guardian/Unum Survey, 2011).
With government incapacity benefit of only £99.15 per week, someone with a salary of £30,000 would suffer a 77% fall in income.
If you lost your income how would you continue to meet your monthly bills if you didn’t have long term protection?
Your Key Options
Choose your level of cover
Depending on the insurer, it is possible to cover anywhere from 50% to 70% of your gross (pre-tax) income.
Choose your deferred period
This is the length of time you would need to be off work before the policy starts paying out. The shortest deferred period is 7 days and the longest is 12 months.
Choose your payout length
Short-term plans can payout for a maximum of 12 or 24 months and long-term plans can continue paying out either until you are well enough to return to work or you reach the end of the policy life.
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What is long term income protection insurance?
Long term income protection insurance provides a means of protecting your earnings from the risk of both short term and long term sickness and injury. Policies can start accumulating benefit after just 4 weeks out of work and can protect your income right up to retirement.
Long-term income protection (also know as long term permanent health insurance) provides a solid means of earnings protection, thus avoiding the need to rely on limited state benefits to survive should you suffer long term sickness or injury.
This form of income replacement insurance could potentially cover your earnings all the way up until you plan to retire, therefore providing long-term earnings protection and peace of mind.
It is possible to make multiple claims under the same policy so you would also be covered from the risk of long-term reoccurring illnesses or injuries. Thus, whether you were off work for 1 year at a time, for example, or for the rest of your working life your monthly income would be protected.
This form of long range financial protection can also be used as a type of long term payment protection as the monthly benefit paid by the insurer upon making a valid claim can be used for whatever purpose you decide, with long-term mortgage protection being one such example.
Do I need it?
One of the largest financial risks we face in life is the loss of our ability to earn an income due to sickness or injury. After all, our livelihood depends upon our ability to go to work each day and earn an income to pay for our rent/mortgage, utility bills, groceries, childcare costs and other living expenses.
Most people would find it difficult enough to survive for 6 months without an income let alone 5 years or even the rest of their working life. In fact, figures from the Department for Social Development show that the average claim length for individuals leaving government Incapacity Benefit (IB) in the first three quarters of 2009 was just over 4 years.
With government incapacity benefit standing at only £99.15 per week would you be able to survive on this income for a sustained period of time? That is if you are actually able to pass the stringent tests for eligibility of this benefit.
Key policy options
With this type of long term earnings cover there are a number of policy options for you to consider, from how long you would like the policy to last, the amount of monthly income you would like to cover and how long you would like to set the deferred (excess) period.
How long can the cover last?
The minimum term with permanent health insurance policies is usually 5 years and the maximum term is often to age 65 years, although some insurers will allow you to take out cover until the age of 70 years. It is usually best to set the policy length equal to the age at which you plan to retire, thus providing earnings cover and therefore financial protection for the remainder of your working life. Should you need to make a claim the policy has the potential to payout each and every month until the policy term ends, however long you decide to set it.
How much income can I cover?
How much you are able to insure depends on the amount of income you earn. In most cases you are able to insure up to 65% of your gross (pre-tax) earnings, although this figure may fall to around 55% for very large monthly sums. As a bare minimum you should look to insure enough to cover your essential monthly outgoings, such as rent/mortgage payments, household bills, debt repayments and a sum for general living expenses.
What is the deferred period?
The deferred period (also known as an excess period) is the length of time before your policy will start to accumulate benefit after your claim is made. It usually makes sense to set this period equal to the length of time your employer will pay you full sick pay should you have to go off work, which can vary from no time at all to one year. If you have savings that you could survive on for a period then you may want to take advantage of the fact that policies with longer deferred periods come with lower premiums.
Can I include unemployment insurance?
Although long range salary protection plans are designed to cover accident and sickness (often referred to as incapacity or disability) a very limited number of policies have an option to include short term redundancy protection. This option is not suitable for everyone so please call us to run through your current situation.
Need some advice
If you would like to receive long term income protection quotes from a panel of leading UK insurers then please submit your details in the quote box provided above.
Alternatively, if you would like to talk through your options with one of your expert and impartial advisors then please feel free to contact us on 0208 432 7333.
Actual Income Protection Claims
The table below details real life stories of how an income protection policy has saved someone financially following an illness which left them unable to work.
The information is from Liverpool Victoria's 2011 claims, it demonstrates how anyone can lose their income, regardless of age, gender or occupation, LV's youngest claimant in 2011 was just 22 years old.
To provide expert financial advice and deliver a passionate 5-star service to help educate our clients so they can make informed decisions.
To help individuals and businesses throughout the UK to plan their financial future whilst protecting them against the financial risks they may face.
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Occupation Definition Calculator
Make sure your Income Protection covers you in your 'Own Occupation'!
Too often individuals take out income protection without being fully aware of the incapacity definition on which their plan would pay out.
Will the plan pay out if I am unable to do my current job role? Or will it only pay out if I am unable to do any occupation?
If you do not already have income protection this tool should provide you with guidance as to what to look out for and to ensure you do not fall foul of a lesser occupation definition.
Independent Protection Expert at Drewberry Insurance