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What is Income Protection?

13/01/2014

The majority of us have insurance for our holidays, our mobiles phones and our cars. It’s always nice to be reminded that if something was to happen on your holiday, to your phone or car, that you would be covered and not have to worry about making up the difference.

Some people don’t know that we can actually insure the thing that is most important to us, financially- our income.

If all of a sudden you were unable to work due to an accident or an illness, what would happen to all your monthly bills such as your mortgage, rent, gas and electricity? How would they get paid? That’s where Income Protection comes in.

With income protection you pay a small amount each month for peace of mind and it ensures that you are protected, and that you have enough money to handle a situation if something out of your control happens.

Income Protection, or IP, provides cover if you're not able to work and earn money due to illness or injury and, in some cases, forced unemployment. This cover will continue until you can go back to work, or until you retire.

The amount of money Income Protection will pay you per month will always be less than your income before you had to stop work. You will usually get about half, or sometimes two thirds of what you earned before, depending on your plan. This is because some money will be taken off for the state benefits you can claim, and also the income you get from the policy is tax free.

You also can’t claim your Income Protection straightaway if you fall ill or become disabled. Depending on the plan you choose, you will have to wait a minimum of four weeks before you can start claiming, but that time can go all the way up to two years. This is because you may not need the money straightaway as you may get sick pay from your employer or you may be able to claim statutory sick pay for up to 28 weeks after you stop work.

Usually with Income Protection, your insurer will ask before hand if you have any existing medical conditions and may offer you a plan with an ‘exclusion’. An Income Protection plan ‘exclusion’ means that, for example, if you have known lower back problems, an insurer can offer you an Income Protection plan. With an ‘exclusion’ included there will be terms that if you are absent due to your lower back a problem, the insurer does not have to pay out.

Your age and your field of employment may also affect your monthly premiums too, so if you are employed in a particularly high risk area it may be worth researching different companies that may specialise in Income Protection in your particular employment area.

Lots of consumers are very involved with getting protection on luxury products, such as watches, televisions and computers when they purchase them, but really, the most important thing is to get your income protected.

What kinds of products are available?


There are different types of Income Protection available, which may be most suited to your situation.


Guaranteed

A Guaranteed policy is when your monthly payments stay the same throughout your policy term, and will only go up if you choose to increase your cover. This can work out more expensive than other policies in the short term, but it saves could save you money in the long term.


Reviewable

Reviewable policies mean the premiums of the policy are reviewed after a set period of time, which can be as regularly as once a year. These types of income protection policies are usually cheaper than ‘Guaranteed policies’ to begin with, but they are likely to cost you more money over time, as the premiums increase.


Age-related

Age related policies often start out much cheaper than Guaranteed and Reviewable policies as they take into account how old you are. However, in the long run they can work out much more expensive than the other two polices for people in low risk jobs.
Age related policies can be popular among people in high risk jobs; this is because occupation and occupation isn’t always taken into account, and therefore the monthly premiums remain attractive. Unlike Reviewable policies, the age-related monthly premium increases are calculated and agreed with you when you take out the policy - so you won't be caught out by any unexpected price hikes.



How is my premium worked out?


Premiums are usually worked out differently by different insurance providers. Some can consider your occupation and how at risk of injury you are. People doing heavy manual work or construction work can sometimes pay higher premiums compared to computer programmers or secretaries, and there are some occupations that insurers simply will not risk insuring. If you have been turned down for Income Protection because of your occupation, it may be worth looking for a specialised insurer who works with high risk occupations.
If you have any health problems, this may also affect your premiums. For example, if there is a possibility that you could be off work due to a illness that you are aware of, you may get an offered a premium with an exclusion. This means if you are absent from work because of your illness, which you disclosed at the time of taking out your income protection, you will not get a pay out; however if you’re absent for any other reason, you will still get your money back.
Income Protection can be quite complex, so it is important to seek financial advice before you buy.



Do I need Income Protection?


Income Protection may not be suitable for everyone. If you are interested in finding out how you can protect your income should you ever become ill and not able to work, it’s important to have a look into it and speak to a financial adviser. I think the best question to ask when considering Income Protection is:
“Should I ever be in the situation where I cannot work for a period time, how will I pay for those items I already insure without my salary?” If you you’re not sure or don’t have answer, then income protection could be the answer. For more information please give us a call on 0800 092 1245 to speak to one of our financial advisers.


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