How Does Sick Pay Insurance Work?
Sickness Insurance is designed to replicate sick pay that you don’t receive from an employer or to provide a boost to a low level of sick pay / state benefits you’re entitled to.
It pays out a regular monthly income until either you’re well enough to return to work, your payment period runs out or until retirement (if you’ve selected long-term cover and are so incapacitated you can never work again).
When setting up Sick Pay Protection, there are four major decisions you’ll have to make which will have an impact on the cost of cover:
- Sum assured
This refers to how much you’ll need as a benefit each month. You can typically cover between 50% and 70% of your gross (pre-tax) income depending on your insurer. While going for the maximum may seem tempting, it will push up the cost of cover so it may be sensible to only consider covering the essentials.
- Your deferral period
How long you can wait before you need to cover to kick in. Think about how long you could comfortably rely on savings / sick pay / other resources and consider setting your deferred period for that length of time. A longer deferred period will notably reduce the cost of cover compared to a shorter one.
- Policy cease age
How long your policy will last for. Most Sick Pay Insurance policies offer cover right up to state retirement age and beyond – as far as up to age 70 – but the older your policy cease age the more expensive your insurance will be.
- Your payout length
Short-term Sick Pay Insurance will only offer cover for a maximum of 1, 2 or 5 years per claim. Long-term cover will protect you for as long as you need it, right up until your policy cease age if you can never work again.
Your Premium Options
There are three main types of premium to consider when choosing sickness pay insurance if you are out of work:
- Reviewable premiums
The insurer can ‘review’ these at any time they see fit for a variety of reasons, from poor economic performance to a spike in claims in a given year. While these premiums usually work out cheaper at the start, they can be reviewed with time, meaning you may not know how much you’ll pay for cover from one year to the next.
- Age-banded premiums
These premiums also start out cheaper but rise over time. However, unlike reviewable premiums the insurer can only increase these by a preset amount each year laid out in your policy documents and the rises you’ll face are solely linked to your age and the increased risk of you claiming as you get older.
- Guaranteed premiums
Guaranteed for the life of the policy. These usually work out a little more expensive initially but are then fixed throughout the policy’s term. This can save money across the life of the policy, especially if you take out cover when you’re young and healthy right up until retirement as premiums are locked in from the point the policy goes live.
Indexing Your Sick Leave Insurance
Inflation is an economic force that acts upon the price of goods and services, usually pushing them higher year-on-year.
Think about the cost of a pint of milk 10 or 20 years ago – it cost a lot less back then! This is because inflation has acted on the price of milk and other goods and services over time.
This means that if you live on a fixed income, you may struggle to keep up with the cost of living because your income will remain the same but prices will continue to rise.
To solve this problem, you can opt to index link your insurance so that the payout keeps pace with inflation.
Each year, the insurer will write to you to inform you of the change to the retail prices index and to say that, if you agree, your benefit will rise by that amount so that it doesn’t get eaten away by inflation.
To compensate for the higher benefit, your premiums will also rise.
Indexation isn’t necessarily as important if you’re only going to hold the policy for a relatively short period, but with a long-term Sickness Insurance policy indexation is usually a good option to consider.
Your Definition of Incapacity
It’s vital to understand the definition of incapacity because this will impact on your ability to claim. It essentially determines the level of impact your accident or sickness must have on your working life before you can receive a payout.
There are three main definitions of incapacity to choose from when setting up Sick Pay Insurance:
Own Occupation Cover
Own occupation cover means that you will be entitled to your benefits as long as your injury or illness prevents you from working in your specific job role.
For example, an architect who injures their hand wouldn’t be able to complete technical drawings and so could make a claim.
Policies that use a suited occupation definition of incapacity mean that in order to claim benefits, you have to be unable to undertake your current job role or any other job where you may have experience or education to perform.
So where an architect with a hand injury may not be able to do their own job, they may not necessarily be able to claim under a ‘suited occupation’ definition because have the skills and experience to do another job role suited to them.
Any Occupation / Work Tasks
This definition of incapacity means you can only claim if you’re so totally unfit to work that you can’t work in any occupation / perform a set number of tasks required at most basic jobs, such as signing your name or typing.
This definition of incapacity is the most difficult to claim on and in general we’d recommend it is best avoided.
Making A Claim
Neil’s Cancer Claim With British Friendly
Neil is a client of Drewberry and took out an Income Protection policy with British Friendly. He was a member for 4 years before he needed to claim.
He became unwell and had pains in his stomach. After consulting his GP and having some further tests Neil was diagnosed with stage 2 Bowel Cancer and needed to make a claim.
🤕 Read More About Neil’s Claim