Do I Need Income Protection?

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30-05-2019

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-employeda 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.

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Can I Get Accident, Sickness And Unemployment Insurance?

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.

Do I Need Accident Insurance? The Statistics…

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.

  • 891,155 people who visited A&E over this period had suffered a dislocation/fracture/joint injury/amputation.
  • 710,763 patients were recorded as having sprained something or injured a ligament and 658,002 patients visited suffering from soft tissue inflammation.
  • Meanwhile, the Health & Safety Executive reported that 72,702 employees in Great Britain were injured on the job in 2015/16. 75.2% had injuries that lasted more than 7 days.
  • This figure included 21,959 people who suffered a sprain/strain and 19,502 people who fractured a bone at work.

Do I Need Sickness Insurance? The Risks…

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.

Risk of Redundancy

1.5 million people aged 16+ were unemployed in the three months to June 2017.

  • 59.2% of these people had been out of work for up to six months.
  • Even with the UK economy recovering, 114,000 people in the UK were still made redundant in 2016. In 2009, at the height of the recession that followed the financial crisis, 235,000 people were put out of work through redundancy.

Permanent Health Insurance: Is It Really Permanent?

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.

How long do claims last?

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.

State Benefits vs Accident, Sickness and Unemployment Insurance

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.

  • If you’re employed and you become too ill to work, your employer may have to offer you 28 weeks of statutory sick pay (SSP) from the fourth day of your incapacity, subject to certain conditions.
  • (SSP) is worth just £95.85 per week. Given that you have to be earning at least £118 per week to be eligible for it, even those earning the least would face a drop in income during their period of absence.
  • Employers aren’t legally obliged to offer any sick leave above SSP, but some do, so check your contract.
  • An employed person still unable to work after 28 weeks may then be entitled to employment and support allowance (ESA). Self-employed people can claim ESA rather than SSP from the start of their incapacity.
  • However, ESA is less generous than SSP. It’s initially worth up to £74.35 per week if you’re over 25.

Unemployment Benefits

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.

What Are The Advantages Of Income Protection?

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.

Income Protection Or Critical Illness?

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.

Income Protection
Critical Illness

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.

Income Protection benefits are tax-free

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.

Added Extras…

Other additional benefits that often come part and parcel with modern Income Protection policies include:

  • Hospitalisation benefit – pays a fixed lump sum for each day you’re hospitalised for more than a set number of days
  • Fracture cover – pays a specified lump sum if you suffer a fracture depending on the body part in question
  • Best doctors / second opinion service – if you’re diagnosed with a serious illness, you get access to a second medical consultation for an in-depth analysis of your case, diagnosis or treatment plan and advice on your condition to help you get appropriate diagnosis, treatment and care.
  • Death Benefit – pays out 3-12 months of Income Protection in the event of the policyholder’s death
  • Recovery / Therapies / Back to Work Benefits – offers treatment and therapies, such as physiotherapy or counselling, to help ease your condition and hopefully facilitate your return to work earlier than otherwise may have been the case by improving your condition.
  • GP Services – Policyholders, and in some cases their families, can speak to a qualified doctor in a matter of hours, rather than waiting days to see their own GP.

How much Income Protection Insurance do I need?

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.

Focus on your core outgoings

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.

Will Income Protection Insurance pay out when I need it?

Some customers are concerned that insurers won’t pay claims when they need them the most. The reality is far different.

  • According to the Association of British Insurers (ABI), 91.2% of Income Protection claims were paid in 2015.
  • This is far above the 66.4% of Total Permanent Disability claims that were accepted, most of which were rejected because the insured did not meet the insurer’s definition of being totally and permanently disabled.
  • Insurers paid £131 million in Income Protection claims in 2015, with the average claimant receiving £27,9354.

“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.

Get Income Protection Advice

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.

Why Speak to Us…

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.

  • There is no fee for our service
  • We are independent and impartial
    Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
  • We’ve got bargaining power on our side
    This allows us to negotiate better premiums for you than you going direct yourself.
  • You’ll speak to a dedicated expert from start to finish
    You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
  • Benefit from our 5-star service
    We pride ourselves on providing a 5-star service, as can be seen from our 2766 and growing independent client reviews rating us at 4.92 / 5.
  • Gain the protection of regulated advice
    You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
  • Claims support when you need it the most
    You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.
Tom Conner Director at Drewberry

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 help@drewberry.co.uk.

Tom Conner
Director at Drewberry

Great service assisting me obtain the right product. Would happily recommend Drewberry following their professional and efficient way of working.

Jonathan Chadwick
08/06/2020
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