Income Protection Policy Options
Choosing Your Level Of Cover
Typically, Income Protection Insurance for teachers can cover between 50% and 70% of your gross salary, although this will vary depending on the insurer you choose. While it may be tempting to opt for the highest level of cover available, the higher the level of cover you choose the more you will pay in premiums.
To avoid over-insuring yourself, it pays to take the time to look at your income and outgoings to see how much cover you actually need. Work out how much of your monthly income goes towards necessary expenses, such as your mortgage payments and utility bills, and decide on a level of cover that will cover your monthly essentials.
Choosing Your Length of Cover
One of the first and most significant options that you will be given with your policy is the choice between short-term and long-term cover.
Short-term Income Protection pays out benefits for a limited time per claim. Per instance of incapacity you may be able to claim for a maximum of 1 to 5 years depending on your insurer. When you reach this limit and have claimed for the maximum amount of time, your monthly payments will stop, regardless of whether you are well enough to return to work.
Long-term Income Protection offers comprehensive cover in that you can continue to claim benefits for an instance of incapacity until you reach retirement age. This means that if you develop a debilitating long-term illness or injury that prevents you from working, you can claim income for as long as you need to get back on your feet.
While the cost of these two types of cover can differ greatly, with long-term cover being more expensive, opting for a longer claim duration is the best way to ensure that your income is protected against long-term health problems.
Long-term policies tend to be better for teachers and other professions with long periods of sick pay, as the Income Protection is designed to kick in only once sick pay has ended. If you have a 2 year policy and sick pay for 1 year, you’ll only be eligible to claim on your policy for 1 year, which would put you at a significant disadvantage.
Setting The Deferred Period
A Deferred Period is the length of time you agree to spend not working while incapacitated before you can begin to claim Income Protection benefits. Setting a longer deferred period can significantly reduce the cost of your policy.
Because you cannot claim Income Protection Insurance benefits while receiving income from elsewhere, a deferred period is usually set to align with policyholders’ sick pay entitlement. Because some teachers’ sick pay schemes work on a sliding scale, it can be difficult to work out the right deferred period for your policy.
If you have enough savings to top up your income while you’re receiving reduced sick pay payments and perhaps last a few weeks more, you can benefit from drastically reduced premiums by setting a longer deferred period. However, if you don’t think your savings will go far enough, it may be best for you not to risk setting a longer deferred period if it will be difficult to keep up with your finances.
Over time, inflation may erode the value of your monthly cover. For that reason, most insurers offer Index Linked Income Protection for Teachers which links the value of your insurance policy to the Retail Price Index (RPI). With this type of cover, your insurer will increase your insurance benefit to match any increases made to the RPI.
However, it should be noted that many insurers will increase your premiums to match any RPI increases as well. Some providers may even increase your premiums by an additional percentage, which can add to the cost of your cover over time.
For these reasons, you will need to be careful when index-linking your cover and read the terms of your policy carefully. Speak to our advisers if you’re uncertain about how indexation works and we will help you decide whether it is right for you.
Type of Premiums
Different Premium Types will impact how the cost of your policy is affected over time and the process used by insurers to determine changes in cost.
Level Guaranteed Premiums are fixed when you take out your Income Protection cover and they will not change for the entire life of your policy provided you do not increase your benefit or have your policy index-linked to maintain pace with inflation.
Age-Banded Premiums will increase at a predictable rate each year to align with your added risk of claiming as you age. Your insurer will either increase your premiums by a fixed percentage per year or they will have a present ‘premiums table’ that they will use to determine by how much your premiums should increase. You will have access to this table before taking out your policy so that you can see for yourself how much you can expect to pay for your policy as you age.
Reviewable Premiums are unpredictable and are reviewed on a regular basis and adjusted in accordance with your and your insurer’s circumstances. If you claim on your policy or if your insurer experiences a year with poor investment returns, there is a good chance that you’ll face increased premiums.