Why Short Term Income Protection?
Short term protection covers your monthly income should you suffer an accident, sickness or unemployment.
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
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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 are unable to earn an income due to accident, sickness or 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 Short Term Protection?
When deciding if income protection 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 essential outgoings without any income 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 will pay a claim until either you return to work or you reach the end of your policy.
They were patient thorrgh and good value for money. I regret not using them before and I will use them again in the future.Edward Brampton
What is short term income protection insurance?
Having to take time off work with subsequent loss of earnings could cause significant financial problems for most individuals and families. Even if our income stops it is certainly the case that our monthly expenses still need to be paid. It is therefore important to arrange insurance to protect against this needless risk.
Short term income protection can cover the risk of lost earnings as a result of accident and sickness, and with some plans unemployment also. This type of plan would payout a monthly benefit whilst you are off work , thus enabling you to keep up to date with rent/mortgage payments, utility bills, grocery costs and other vital monthly expenses.
Income protection or payment protection?
This type of cover usually falls within two very different policy types, payment protection and income protection. The quality and scope of cover varies significantly between these two policy types so it is very important to arrange the most appropriate plan.
Income Protection Insurance
This type of plan was originally designed to cover earnings until retirement against the risk of illness and injury only. These are very comprehensive plans as most individuals can gain ‘own occupation’ cover, meaning that the plan would payout if you are unable to do your own job (payout rates are usually over 90 per cent). In other words, the insurer has no right to ask you to undertake another type of work even if you are medically able to do so.
Income protection insurers now offer plans that can cover earnings just in the short-term (usually up to 24 months) rather than until retirement. Thus, if you are only looking for accident and sickness cover it is possible to take out a short-term income protection plan with very comprehensive cover but with far lower premiums as the plan could only payout for 24 months.
Payment Protection Insurance
This type of cover is a short-term form of income or expenditure protection against the risk of accident, sickness or unemployment. With regards to accident and sickness cover most plans would only cover you in a suited occupation rather than your own occupation and are particularly weak when it comes to back, chronic and mental health conditions, such as for stress.
Short term protection options
Short term illness and injury
If you are looking to cover your earnings against the risk of sickness or injury then the most comprehensive policy choice would a short-term income insurance plan rather than accident and sickness cover under a payment protection plan.
For the vast majority of jobs it would be possible to gain ‘own occupation’ cover. With such a plan the only real exclusion would be for self-inflicted injuries or illnesses, possibly as a result of a suicide attempt, for example. Other than that, the plan would payout for any medical reason that prevents you from doing your own job.
For lower risk occupations it is possible to take out an income protection plan where the monthly premiums are fixed over the life of the policy. It is often the case that the monthly premiums for such a plan are actually lower than those far a payment protection plan (where premiums are reviewable) as the insurers risk pool results in fewer claims. For higher risk occupations, most insurers who offer own occupation protection would increase the monthly premiums with age to reflect higher risk.
Short term unemployment
If you are looking for just unemployment protection then it would be necessary to take out a payment protection plan, which could cover a percentage of your earnings for up to 12 consecutive months. Please note that redundancy protection is not usually suitable for contract workers, shareholding directors or the self-employed.
If you would like cover for accident, sickness and unemployment then you have the option of taking out one payment protection plan covering all three risks or a short-term income protection policy (with more comprehensive cover) and an unemployment only payment protection plan.
Long term protection options
When looking for this type of cover it is common for people to think about a short-term injury, such as a broken leg, preventing them from working. Naturally, such an injury wouldn’t keep someone off work for very long.
Unfortunately, the reality is that the real financial risk comes more serious illness or injury. Of course, the loss of two or three months earnings would be a massive inconvenience for most households but the loss of two or three years earnings could be financially irrecoverable.
Statistics from Working for Health (2010) state that if you are off work sick for 6 months you have an 80 per cent chance of being off work or 5 years, which really puts the inadequacy of short-term salary insurance plans in perspective. This is why it is wise to at least consider a long-term protection plan that could payout until retirement rather than just 12 or 24 months.
When looking for income protection cover there are a number of important policy options for to consider, such as the following:
Level of cover
Firstly, it is very important to note that most insurers have limits on the maximum amount of cover you are able to insure. These limits range from 50 per cent to 65 per cent of gross (pre-tax) personal earnings, depending on the insurer. You do not necessarily need to insure the maximum allowable, the main point is that you insure enough to cover your essential monthly expenditure.
The deferred period is the amount of time after going off work before the plan will start to accumulate benefit. For example, with a 30 day deferred period the plan would start accumulating benefit after 30 days, with the first payment being received on day 61. It makes sense to set the deferred period in-line with your company sick pay entitlement (if any) and level of savings as the monthly premiums come down significantly as the deferred period is extended.
With short term earnings protection it is possible to include an option where the level of benefit rises over time with inflation (usually measured by the Retail Price Index). Including this option means that the real value of your cover will remain constant over time. It is important to note that the both the monthly benefit and your monthly premiums will rise each year in-line with inflation.
Need some guidance
As it can be seen from the information above there are not only many policy options to choose from but also completely different plans to consider, namely short-term income protection and payment protection. The best policy choice will usually depend on your specific situation so it is normally wise to run through with an adviser.
If you would like to discuss your options with a Drewberry adviser please feel free to call us on 020 8432 7333 or submit your details in the quote box above. After discussing your circumstances an adviser will be able to send you some suitable policy options with the policy pricing.
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.
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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