Taking out an income protection plan usually makes complete sense from a long-term financial planning perspective. This type of insurance (also known as permanent health insurance) covers the financial risk caused by sickness and injury by protecting up to 65 per cent of monthly earnings until retirement.
Although the merits of sickness and injury protection are clear many manual workers find it difficult to gain cover as the nature of their work puts them in a high risk class (occupation classes 3 and 4, respectively), which means that the premiums can be very high.
Although there is nothing that can be done in terms of moving to a less risky occupation class there are some really important tips for gaining affordable cover. The main tips for manual workers looking for long-term earnings protection are as follows:
- Extend the Deferred Period – The length of deferred period makes a massive difference to the premium level. Try and save up a number of months wages to support yourself should you have to go off work and take out a plan with a longer deferred period.
- Cover the Essentials – Naturally, lowing the amount of cover will reduce the monthly premiums so look at options that cover your essential monthly costs, such a mortgage payments/rent, food and utility bills.
- Get Covered Young – Premiums rise rapidly with age so take out a plan with guaranteed (fixed) premiums as early as possible as cover may no longer be affordable later on down the road.
- Reduced Term Plan – If you plan to retire at age 60 rather than age 65 then set the policy end date at age 60. As the highest illness risk is beween the age of 60 and 65 it can bring the monthly premiums down considerably.
- Reduced Payment Period – Plans can be taken out where they would payout for a maximum of 5 years should a claim need to be made, which can make a huge difference to the monthly premium.
Extend the Deferred Period
Income insurance premiums can be especially high for plans with very short deferred periods (the period of time before the policy starts to accumulate benefit). Moving from a deferred period of 4 weeks to 13 weeks can reduce monthly premiums by around 40-50 per cent, for example.
Many manual and self-employed workers do not receive sick pay so often request plans with a deferred period of 4 weeks, which is the shortest waiting time available. The issue with this is that it is far more likely a claim will be made with such a short deferred period and therefore the monthly premiums can be significantly higher.
The purpose of income protection is to protect your earnings over the medium and long-term (all the way up until retirement). If you are looking for a plan that covers earnings in the short-term (up to 12 months) then consider an accident and sickness plan, which come with far lower premiums given the reduced level of protection.
It is often the case that manual workers have to take out a plan with longer deferred periods in order to bring the premiums down to affordable levels. The best financial plan in this respect is to try to save up three months earnings and then take out a plan with a deferred period of 13 weeks, which will lower the premiums significantly. With this option you would have short-term protection in the form of your savings and medium and long-term protection with your insurance policy.
Cover the Essentials
If you are really keen to have a long-term plan but the premiums are too high covering 50-65 per cent of your monthly income then consider reducing the sum insured so it is just enough to cover your essential living costs. Remember, it is likely that your car and entertainment costs will fall of you are off work due to illness or injury.
If you were off work long-term the main concern is in covering the essential costs in life. Thus, in order to work out the minimum amount of cover needed try to calculate how much you spend each month on: 1) rent/mortgage payments; 2) council tax; 3) utility bills 4) food; and 5) other credit/loan payments.
Get Covered Young
Admittedly, there is nothing that can be done about your age but it is important to note that premiums do rise rapidly as you grow older so there is no time to be wasted in terms of looking for a suitable plan. You can also educate younger colleagues on the value of taking out a plan as young as possible.
As an example of the difference in monthly premiums consider a carpenter looking for £1,000 per month of cover. For a plan lasting until age 60 with a deferred period of 13 weeks the monthly premiums at 30 years old would be around £35 per month. If that same carpenter was 40 years old the premiums would be around £55 per month, an increase of £20 per month over 10 years.
As the premiums with these plans can be set on guaranteed rates (where they remain fixed over the life of the plan) it makes sense to take out cover as young as possible.
Reduced Payment Period
This tip has been put last as it essentially means that some of the long-term benefit of the plan would be lost. However, it does provide manual workers with access to affordable medium term protection.
Normally income protection policies would payout until either you returned to work or you reached the end of the policy life, which is usually set at either age 60 or 65 years. It is possible to select an option where the plan would payout either until you returned to work or the plan had paid out for 5 years, meaning that you essentially have 60 months of cover.
Reduced Term Plan
The national retirement age is currently 65 years old and therefore most plans last until age 65. If you plan to retire at age 60 then it makes sense to set the policy termination age at 60 years old. Lowering the cover cease age from 65 to 60 years of age can bring the premiums down by around 25 per cent.