Income Protection Insurance insures your wages against the risk of accident, sickness and (in some cases) unemployment. The policy will replace a proportion of your monthly salary if you can’t work.
Whether you need Income Protection cover or not because is dependent on your individual circumstances. Simply ask yourself…
Would I be able to survive financially if I was out of work for 6 months or more?
If you’re working and you and your dependents couldn’t survive without that income, then Income Protection could be very important financial protection.
Accident and Sickness insurance is available whether you’re employed, self-employed, a contractor or a company director and it will kick in with a tax-free monthly benefit after your deferral period ends.
According to consumer group Which?, Income Protection is the one policy every working adult should consider.
Income Protection is linked to your earnings, so you won’t be able to get and compare Income Protection quotes unless you’re working. Providing you are, an Accident and Sickness Insurance policy will cover you if you have to stop work because of illness or injury.
Unemployment Insurance is also available, covering you if you’re made redundant or lose your job through no fault of your own. As a package, this is known as Accident, Sickness and Unemployment (ASU) Insurance.
It’s important to note that Drewberry would only recommend Unemployment Insurance for employed workers.
This is because if you’re self-employed or otherwise working for yourself (e.g. as a sole trader or director of your own limited company) it’s very hard to prove that you’re out of work through no fault of your own as you’re the one in charge.
3.9 million A&E visits in England alone were classed as down to ‘other accident’ in the year to March 2016. This accounted for 1 in 5 A&E visits that year.
There were almost 2 million people in the UK not looking for work due to long-term sickness in the three months to May 2017.
1.5 million people aged 16+ were unemployed in the three months to June 2017.
Income Protection is sometimes known as Permanent Health Insurance (PHI) because it’s a long-term policy covering you for an extended period – most policies offer you protection up to your state retirement age.
The average length of a claim on an LV Income Protection policy in 2015 was five years and six months, while Royal London’s average Income Protection claim in 2014 lasted just over four years.
If you’re unfortunate enough to fall seriously ill more than once during your working life, you can claim on an Income Protection policy as many times as you need to, providing the policy remains in force.
If you were forced to stop working due to injury/ill health, or you were made redundant, could you be able to survive on incapacity or unemployment benefits?
Income Protection insurers allow you to insure between 50% and 70% of your income, but government benefits are far less generous.
The main unemployment benefit is Jobseeker’s Allowance, now part of Universal Credit. This is available to most people aged between 18 and their state pension age.
This starts at £317.82 per month if you’re single and over the age of 25. You can get more than this (additional amounts can be added on to this ‘base’ figure if you have children or are responsible for paying housing costs, for example) depending on your circumstances.
However, Universal Credit is paid in arrears. This means after you apply it will usually take 5 weeks to get your first payment.
While you can ask for an advance payment if you don’t think you’ll have enough money to live on while you wait, this will be dependent on your circumstances and isn’t guaranteed. As such, you need to be aware that you could need to live off your own resources for some time before receiving any benefits.
Even once you receive your benefits, they’re rarely enough to make up pre-unemployment household expenditure.
Income Protection insurance is a comprehensive cover that insures your salary against most eventualities that would see you unable to work due to illness and injury.
If you have opted for Unemployment Insurance as part of your Income Protection policy, you’ll also be covered if you’re made redundant or are otherwise put out of work due to no fault of your own.
You won’t need Total Permanent Disability (TPD) Insurance on top of Income Protection as this is built into Accident and Sickness policies by default.
This is discussed in more detail here, but in broad terms Income Protection Insurance offers a wider scope of cover than Critical Illness policies.
Critical Illness Insurance is usually cheaper than Income Protection because Critical Illness Insurance covers fewer conditions. However, if you have a strict budget and are only looking for insurance that will cover you for the most serious illnesses/injuries, then Critical Illness might be the better option.
Pays out whether the condition is deemed critical or not – it just has to stop you working.
Covers a maximum of around 50 serious or ‘critical’ illnesses – the most common reasons for claiming are due to cancer, heart attacks and strokes.
Pays an income for the remainder of the policy period if that’s the option you’ve chosen.
Pays once in a lump sum on diagnosis of a qualifying disease.
You can claim again at a later date should you be unfortunate enough to fall ill once more.
Once the policy has paid out, it ends and you receive no further benefit from it.
The benefit is linked to your income.
You can insure yourself for any amount of money, providing the premiums payments are practical and affordable.
Accident, Sickness and Unemployment Insurance payouts are not taxable. As you’ve already had tax deducted from the income used to pay the premiums, HMRC does not tax Income Protection payments to avoid double taxation.
That’s why most insurers only allow you to insure up to 70% of your pre-tax (gross) income as this figure roughly equates to your post-tax (net) income.
The exception is for Income Protection policies paid for by companies. In some instances, self-employed people and company directors can arrange for their company to pay Income Protection policies, which are then generally treated as a business expense that HMRC allows against corporation tax.
However, this means that the benefit from Income Protection plans paid for by a limited company are treated as a trading receipt and taxed accordingly. It’s therefore important in these instances to gross up the benefit so that the insured has an appropriate level of post-tax income.
Other additional benefits that often come part and parcel with modern Income Protection policies include:
Depending on the insurer, Income Protection offers you cover for between 50% and 70% of your pre-tax (gross) income.
It’s worth speaking to one of our advisers when taking out Income Protection. They’re not just here to help you get quotes for Accident, Sickness and Unemployment cover – they also have access to the entire insurance market and know the proportion of your income each insurer is willing to cover. This knowledge allows us to best match you with the insurer most suited to your individual needs.
When taking out ASU Insurance, you should consider your core outgoings and ensure the monthly payout will be enough to cover those. These are generally things like utilities and other bills, housing costs (e.g. rent or mortgage payments) and any other loan repayments you have to meet.
If this is difficult to visualise, our advisers are more than happy to help you sift through your outgoings to determine the level of cover you need.
Some customers are concerned that insurers won’t pay claims when they need them the most. The reality is far different.
“When claims are declined this is usually due to the customer not disclosing important information when taking out the policy, or claiming for a condition that is not covered,” reports the ABI.
It’s excellent news that only 8.8% of Income Protection claims were turned down last year. This means the vast majority of people were helped when they needed it the most.
For those claims that were turned down, the ABI itself stresses how important it is to be upfront and honest when buying insurance. It’s essential for you to disclose your medical history to us at the time you’re taking out the plan. Otherwise, your claim might be denied further down the line.
Taking out Income Protection can be a bit of a minefield, we are on hand to help make sure you avoid the many pitfalls and take out the most suitable cover.
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.
If you’re still unsure about whether you need Income Protection and would like some help please don’t hesitate to get in touch.
Pop us a call on 02084327333 or email firstname.lastname@example.org.
Director at Drewberry
Very helpful from start to finish. Talked through all the points and gave great advice.