Income Protection Insurance.
What is income protection?
What would you do if you found yourself unable to work? How would you get by financially without your income?
No-one likes to dwell on unhappy scenarios, but while we insure our cars and homes against misfortune, we often forget to insure one of our most valuable assets – our ability to earn. If you are unsure how you would stay afloat financially without your income, you should consider insuring it. Better to be safe than sorry.
Income protection insurance – also known as permanent health insurance – is designed to cover you financially should you fall ill or have a serious accident that affects your ability to work. It is different from critical illness cover as it pays you an income rather than a lump sum.
Here at Oaktree Financial, we can help you navigate the world of income protection. Whether you worry about providing for loved ones or maintaining your living standards, our jargon free advice can explain the income protection options available to you.
Income Protection is designed to cover you against accidents or ill health
It is different from Critical Illness Cover as it pays you an income rather than a lump sum.
What you need to know.
Income protection works in the same way as most insurance policies. You pay a regular premium in order to maintain your cover. When setting up the policy, you choose the level of cover you need, and pick between several variables to create a policy that is right for you. This can mean variations in the amount you will be paid, the length of time you need to be out of work before you can claim, and the overall term of the insurance.
With these variables to consider, income protection can seem complex. Here are the three main points you need to understand about income protection policies.
There is a maximum benefit that will vary from one insurer to another but is normally around 75% of gross income. The benefit is normally paid monthly to the policyholder after a set deferred period.
You can receive tax relief on the contributions paid, which is determined by the marginal rates income tax levels you pay. i.e. 20% or 40%
This type of policy is pure protection insurance so there is no cash in value at any time.
The deferred period is the waiting time between the start of inability to work and the commencement of payment of the benefit.
It will normally be 8, 13, 26 or 52 weeks. Most people will match this to how long they are paid by their employer in the event of incapacity.
Self-employed individuals will normally opt for a short deferred period as income quite often stops immediately.
The longer the deferred period the lower the monthly or annual premium will be.
The benefit will normally be paid out until the sooner of return to work, death or reaching an age specified at outset.
Normally people will choose a policy term that runs until their chosen retirement age. However, insuring until an earlier age will reduce the monthly or annual premium paid.
Different types of income protection
It’s worth noting that as well as variations within policies, there are different types of income protection available. Group schemes will be available in some workplaces, and this can be an option that will keep your policy costs lower. However, an individual policy will be specifically tailored to your needs, and so can be preferable. Seek professional advice before opting for one or the other.
What do you need to do before starting an income protection policy?
Before starting your policy, you need to make sure you are fully informed about your current situation. What are the terms of support from your employer, regarding absence due to illness? How long will they pay you sick pay for, and at what level? Is there a group scheme in place through your company that you could join? It is also valuable to know your household budget well – what are your non-negotiable outgoings and where could you save? You want to know exactly how much you need your policy to provide, but of course the more you want to get from your policy, the more it will cost. So you must have the right figures in order to get the right cover. Once you have all the information, it’s wise to speak to an independent financial adviser, who will be able to guide you towards the best policy for your individual situation.
What are the benefits of income protection insurance?
- Peace of mind – rest easy knowing that in the event of misfortune, you and your loved ones won’t have to suffer financially. It’s one less thing to worry about.
- Responsibility – if you are the main or sole earner, providing for your family will be one of your key priorities. Guard their future by insuring your income properly.
- Flexibility – policies can be tailored to your needs. Your financial adviser will be able to help you understand the factors which alter the terms of your cover and affect the cost of the policy.
- Financial security – while many dream of paying off their mortgage or getting a promotion in hopes of financial freedom, true freedom lies in knowing you are secure, no matter what the future holds. An income protection policy can ease any worries about accidents and illness that could affect your earnings.
How much of your income is protected?
It’s important to note that income protection insurance isn’t a straightforward replacement of your salary. The maximum benefit payable is generally 75% of your earnings. Social welfare benefits will also be deducted from what your policy pays out. So it’s best to discuss with your financial adviser to get an exact figure for what your pay out might be.
If you need to claim on your income protection policy, how long can you claim for?
This is dependent on the terms of your policy. While many people choose a policy that covers them until retirement or death, some set a limit at a specific age. Your benefits will also stop if you recover enough to return to work. Your insurance company’s medical officer may assess your health, and if they deem you able to work, your benefits will stop. Payments will also come to an end on your death.
If you do not pay your premiums on time, your cover may lapse, and your policy may not pay out at all.
Why do you need income protection?
For most adults, life is full of commitments. Whether that is a mortgage, monthly bills, or childcare costs, your working income covers many important features of your life. If you didn’t have that income, paying those key outgoings could become difficult or impossible. Debts mount fast, and a financially precarious situation can quickly spiral out of control with just one unforeseen accident or illness. Getting a good income protection policy in place means you can live worry-free, knowing that even in the worst case scenario, your essential outgoings can be paid and you can maintain your standard of life, for yourself and for those you care for.
What can affect the cost of your income protection cover?
There are several factors that can affect the cost of your income protection cover, and it is key to understand these. You will need to balance the affordability of your premium against the level of cover you will gain. The main factors affecting the cost of cover are:
- The percentage of your income that is protected ie the amount of cover you actually have.
- The deferred period, ie how long it is between becoming unable to work, and being able to claim your income protection.
- The length of your policy. Most people choose to get cover that would provide them with an income up until retirement age, or until death, but the shorter the length of your cover, the cheaper it will be.
- Lifestyle and current health. This will be assessed by your insurance provider, and those with higher health risk factors, such as smokers or extreme sports enthusiasts, will likely face higher premium costs.
- Your current age will also be assessed as a risk factor by your insurance provider.
- Medical history. Those who have experienced health problems in the past may find that their insurance costs more.
- If your job is perceived to be more risky by your insurance provider, this will affect the cost of your insurance premium.
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Book a chat today to begin protecting your income in uncertain times.
How can Oaktree Financial help?
In the fast-paced modern world, it’s easy to push ideas such as getting income protection to the bottom of the never ending ‘to-do’ list. But having sufficient cover in place for your family’s needs is key to true peace of mind, and the most responsible way to look after your future. Oaktree Financial can help by taking away the complications. Our jargon-free, friendly advice will be tailored for your specific situation, making it easy to navigate the world of insurance and simply get the cover you need. Give yourself the gift of peace of mind, get in touch with Oaktree Financial today and book your complimentary consultation.