Policy Factors Affecting The Cost Of Income Protection
When it comes to putting Income Protection Insurance in place, there are a number of policy factors which will also affect the amount you’ll pay for your cover.
The Level Of Benefit Needed
Just like with most things in life, you get what you pay for, it’s no different with Income Protection. The higher the claim benefit you need, the higher your premiums will be.
How Much Income Protection Cover Do I Need?
This ultimately depends on your financial circumstances. As mentioned, you can cover between 50% and 70% of your gross earnings, while some insurers allow you to protect a higher benefit in monetary terms than others.
Think carefully about how much money you’ll need each month. Key essential outgoings most of our clients seek to cover include their:
- Mortgage / rent
- Utilities and other bills
- Council tax
- Loans / credit card repayments
- Childcare costs
- Weekly food shop.
It is important when deciding on a level of cover that you don’t just opt for the maximum and instead consider what your outgoings would look like if you were unable to work.
Transport and costs associated with going out are likely to disappear if you are too ill to work so it is important to align your level of cover with your core outgoings to avoid higher premium costs.
For example if you wanted to cover £1,500 a month, your premiums would be less than if you wanted to cover £2,000 a month.
If you already know how much cover you require you an use our calculator to compare quotes from all the leading UK insurers including Aviva and Vitality 😊
Opt for Budget Income Protection To Reduce The Cost
Traditionally income protection was designed to protect your earnings for your entire working life however some providers now offer budget policies that will only pay a claim for a maximum of 1-2 years.
Given the risk is significantly lower when only paying a claim for a couple of years you can significantly reduce your premiums with budget cover.
It is important to note that the average claim length with leading insurer LV= is 6-7 years which is significantly longer than that covered by a short term policy.
The Longer You Need Cover The Higher The Premiums
The cost of Income Protection Insurance will be affected by the length of time that you need cover for.
For example if you only need a policy to the age of 55 your premiums would be cheaper than someone else who wants a policy to cease at age 65.
If you are likely to have significant pension provisions or will have paid off your mortgage you can consider an earlier cease age to reduce your premiums.
Lengthening Your Deferred Period Can Significantly Reduce Your Premiums
As mentioned above, one factor that will affect the cost of Income Protection premiums is the deferral period you select when taking out cover.
The deferred period is the length of time you need to be ill before the insurance starts paying a claim. Deferred periods can range from 1 week to over a year.
Most people will align this with their sick pay or the amount of savings they have.
Taking Your Savings Into Account
If you have savings you could use these to reduce the cost of your Income Protection premiums.
The longer the deferral period you select the cheaper your premiums will be, so if you know you have enough savings to last you 8 weeks if unable to work, you could use those instead of having your policy pay out straight away.
Consider Your Sick Pay Entitlement
Not everyone is lucky enough to get sick pay from their employer. However if you are, it’s worth understanding just how much you get and for how long as this could also help you to reduce the cost of your premiums.
For example, if you get full sick pay for 13 weeks, you could put a 13 week deferral period in place and have your insurance benefit pay out once your sick pay has stopped.
If you know your sick pay or savings would cover your regular monthly outgoings for 8 weeks, you can select this as your deferral, however if you know that you would need your claim to pay out straight away you could select a shorter period instead.
Guaranteed Premiums Are More Expensive
When selecting Income Protection Insurance there are three different premium types to be aware of. The price you pay for a policy will vary depending on which you select.
- Age Banded Premiums
These premiums will increase with age, so the older you get the more you will pay. Initially they can seem like a cost effective option, however they can increase by over 5 times as you age.
- Guaranteed Premiums
Your monthly premiums remain fixed over the entire life of a policy so you know exactly how much you will be paying. Although these premiums will seem more expensive initially, over the life of a plan it can work out less costly.
- Reviewable Premiums
The insurer has the right to change monthly premiums over time. Although initially these premiums are cheaper, there is a risk that the monthly cost may become too high as you get older or if the insurer experiences a notable peak in claims in a given year.