When taking out an income protection insurance policy you will need choose a deferred period (also known as an excess period or waiting period). When setting this length of time there are a number of very important factors to consider, impacting on when the policy will payout and the monthly premiums charged by the insurer.
What is a Deferred Period?
The deferment period is the period of time before your policy will begin to accumulate benefit after you go off work. For example, with a deferred period of one month the policy would start to accumulate benefit between month one and two, with the insurer making the first payment at the end of the second month (i.e. the benefit is paid in arrears).
What length of excess period you choose may depend on which type of earnings cover you decide to take out (income protection for incapacity cover or payment protection for accident, sickness and unemployment cover). The length of the deferred period can also make a large difference to the quoted premiums so it is important to consider your options fully.
Deferred Period and Sick Pay
As with all income protection insurance plans it usually makes sense to set the deferred period equal to the length of time you would receive full company paid sick leave. Some companies may pay full sick pay for as long as a year but most firms pay minimal sick pay and some companies pay no sick pay at all (over and above statutory sick pay of £81.60 per week for the first three months of incapacity, as of May 2011).
It is very important to note that the insurer will not usually start making payments until you have stopped receiving full sick pay, even if you have surpassed your waiting period.
Naturally, those who are self-employed do not receive sick pay (or any employer-provided insurance benefits) and may therefore wish to set a shorter deferred period so the benefit can begin accumulating as early as possible after going off work (if needed).
Those who have an amount of savings and could fund their living expenses for a period of time without income cover may want to set a longer excess period in order to gain lower monthly premiums, which can make a very large difference.
Long-term income protection insurance
Long-term earnings insurance can provide income cover against the risk of sickness or injury all the way up until your planned retirement. Deferred periods with this form of earnings protection range from one month to one year.
Given that this type of policy is a long-term plan, deferred periods are usually set at between 8 and 26 weeks in length. However, clients who receive minimal or no sick pay or those who are self-employed often opt for the shortest available excess period of 4 weeks (naturally, this may depend on your level of savings).
It should be noted that with long-term income cover the length of the excess period can make a considerable difference to the premium charged. Given that it is possible to make multiple claims on the same plan, there is a much greater chance of the insurer having to payout more frequently with policies with short deferred periods and therefore the premiums need to rise to reflect this.
As an example, it is entirely possible for the premiums charged to fall by 50 percent when moving from a policy with an excess period of 4 weeks to one with 26 weeks.
Short-term accident, sickness and unemployment cover
Accident, sickness and unemployment (ASU) plans (also know as payment protection insurance) pays a monthly benefit should the policyholder have to cease working due to any of these events and has the potential to payout for either 12 or 24 months. This type of cover is usually taken out to protect a specific financial committment, such as repaying a mortgage loan or credit card.
The deferment period with this type of policy should usually be set equal to the length of time you receive full company sick pay. One of the advantages of accident, sickness and unemployment cover is that you are able to include the ‘back-to-day-one’ option, which means that benefit can begin accumulating from the first day you make your claim (with the first payment being received on day 31). This option is particularly applicable for those who do not receive sick pay, including the self-employed.
For the unemployment insurance side of the plan it makes sense to consider how much redundancy pay you would receive from your employer (which is usually paid as a lump-sum) and set the waiting period accordingly. With some ASU plans it is possible to set one excess period for the accident and sickness side of the plan and a different excess period for the unemployment side of the policy.
Deferred periods range from 30 days to 180 days and the back-to-day-one option can be implemented with excess periods of either 30 days or 60 days. Although increasing the deferred period with this policy type lowers the monthly premium charged the difference is not as large as with long-term earnings protection.