Short Term Income Protection

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.

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 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.

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.

Deferred period

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.

Inflation linking

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.

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.