Why Income Protection Is Important

Why Do I Need Income Protection?

According to an ABI study in 2017, over 1 million people in the UK find themselves in a position where they are unable to work due to serious illness or injury every year. If you were unfortunate enough to be one of these people, how long would you be able to survive on savings or possibly sick pay from work? Otherwise, you will need some other way to keep paying your mortgage and bills and that’s where Income Protection can help.

Only a small percentage of employers support their staff for more than a year if they're off sick from work due to illness or injury. Combine that with the low level of state benefits available in the UK, everyone of working age should consider income protection.

However, in a recent study by Which? when asked, just 9% of people surveyed confirmed that they have some form of income protection, compared with 41% who have life insurance and 16% who have private health insurance.

Which? summarised that “the one protection policy every working adult in the UK should consider is the very one most of us don't have - income protection”.

Some of the benefits of Income Protection include:

• Income Protection replaces some of your income if you can’t work due to illness, injury or if you become disabled
• Income Protection pays out until you are able to start work again, until you retire, die or the end of the policy, whichever is sooner.
• You can wait before the payments start until your sick pay from work ends or any other insurance stops. The longer you can wait, the lower the monthly premiums will be.
• Income Protection covers most illnesses that stop you from being able to work, though this can depend on the type of policy and its definition of illness.
• You can claim as many times as you need to on your Income Protection policy, whilst the policy lasts.

As with other types of Insurance, Income protection policies can come with a whole range of different benefits. Not all insurers will offer all of these additional features, so it is important to sit down with your Adviser to talk through what benefits are the most important to your particular circumstances. Some of the additional features you may encounter include:

• Pay-outs for hospitalisation
• Life insurance
• Payments when you go back to work
• No deferral period if you get ill again

 

How Much Does Income Protection Cost?

It may not be as much as you think! Your monthly premium will depend on the policy and your personal circumstances. The cost of an Income Protection policy will vary depending on a number of factors, including:

• Your age
• Your job (see below for additional information)
• Whether you currently smoke or have previously smoked
• The percentage of income you’d like to cover
• The deferral (waiting) period before the policy pays out
• The range of illnesses and injuries covered
• Your Health (your current health, your weight, your family medical history).

The more ‘risk’ the type of job you have, the more likely it is that you may need to make a claim. Therefore, those in the riskiest job categories tend to pay higher premiums. Insurers tend to classify jobs into one of four categories ranging from low-risk positions (managers, administrative staff etc.) through to higher risk jobs (heavy manual workers, construction workers etc).

 

How much does income protection pay out?

The amount that Income protection pays out is usually calculated as a percentage of your earnings, most commonly between 50% up to 70%. Sometimes, a policy may pay out a higher percentage of a certain value of your salary (perhaps the first £50,000 for example), and then a lower percentage of anything above that.

For example, if your annual salary is £30,000 a year, and you take out an income protection policy that is agreed to pay out 60% of your annual salary. If you became ill and unable to work, over the first 12 months that you claim on your policy, you will receive a payment of £30,000 x 60% = £18,000. The good news is that you do not have to pay income tax on income protection payments.

Income protection policies begin to pay out only once a pre-agreed (at the time you take the policy out) period has passed. This period most commonly ranges from one to twelve months after you put in a claim. The longer the 'deferral' period you choose on the policy, the lower your monthly premiums will be.

 

How to work out the level of cover for income protection insurance

To work out the level of cover you need for income protection insurance:

• Work out how much your monthly take-home pay currently is, you can usually find this on your payslip.
• Subtract from this the amount you would get in state benefits
• In addition, take away any work related costs, such as travel, food and parking for example
• Then, add on any additional expenses you might need if you become ill or disabled, such as extra heating costs or the costs of medical equipment etc.

For more help on how to work out the optimum amount of cover you would need, contact your local Mortgage Solutions Adviser. They have a lot of experience with working out these costs, as some may be difficult to predict in advance.

 

Other considerations for Income Protection

Inflation is an important issue to think about when taking out an income protection policy. When you are in work, some people receive an annual increase in their salary to ensure that their pay stays level with the rising cost of living. If you end up having to claim on an income protection policy that only pays out a proportion of your current salary (which does not take into account future rises in the cost of living), the amount you effectively receive will be worth less and less over the years.

This option is referred to as 'index linking' your income protection policy, meaning it rises with a measure of the inflation rate. This will increase your premiums each year, too. They are usually increased by a little more than the rate of inflation.

 

Is this the best type of illness insurance for me?

Talk to your local Mortgage Solutions Adviser today, they will be able to explain all of the different types of illness insurance to see which one would suit your situation the best. You can see from our many positive customer reviews that we have the experience to find the right mortgage, insurance and protection policies for you. In fact, in 2019 we protected over 2,300 customers to give them peace of mind should the worst happen.