Personal Financial Planning
Income Protection Insurance
What is Income Protection?
Income Protection Insurance is an effective way to cover loss of income in the event you are forced into unemployment or are unable to work due to no fault of your own such as illness or injury. Income protection insurance pay-out will be activated in such events and will provide you with a regular income until you are able to return to work; giving you the comfort that your livelihood will not be significantly affected by your circumstances.
There is often a waiting period involved with Income Protection Insurance payments, meaning you cannot claim your payments as soon as you become ill. This is because payments are typically set up to start paying after standard sick pay would end from your employer. You may also be able to claim statutory sick pay in the time between leaving work and the start of your insurance pay-out. The longer you wait to get paid out, the lower the monthly premiums will be.
Income protection is purely income based. This means you do not have to declare any of your expenses such as outgoings towards mortgages, loans, or other commitments, thus simplifying the process.
You can buy income protection insurance regardless of your type of employment – employed, self-employed or contract employment. However, the eligibility criteria do differ depending on your type of employment.
There are several income protection insurance providers. Every insurer has a well-defined approach towards how much you can cover yourself for. Most insurers allow up to 50% of your gross monthly income as the maximum benefit amount, while some insurers allow up to 65% of your gross monthly income.
Short Term and Long-Term Income Protection Insurance
Income Protection Insurance can be divided broadly into two types – Short Term Income Protection Insurance and Long-Term Income Protection Insurance.
With short-term policies, the cover options available are:
- Unemployment, Accident & Sickness Cover
The most comprehensive form of income protection, this policy will cover you against most eventualities and will supplement your loss of regular income with monthly pay-outs.
- Accident & Sickness Cover
Specifically designed to cover against loss of earnings through injury or illness. This can be short-term cover lasting around one or two years, or long-term insurance lasting anywhere from 5 years up to all the way through to retirement.
- Unemployment Cover
If you lose your job, this type of cover will pay out a tax-free monthly income to make up for your loss of regular pay.
Key Elements of Short-Term and Long-Term Policies
Short-term policies pay out for a defined period and are designed to give you time to regain your health or find another job and get back to work. Generally, the maximum number of months you can seek a claim will be anywhere from 12 months to 18 months. Therefore, it is important to note that if you are looking for unemployment only then the maximum you can cover will be only 12 to 18 months.
With long term policies, the only cover option you have available is “Accident & Sickness only” and therefore it will not cover you if you lose your job and are made redundant. However, long-term policies can cover until you reach the age of 65 years. One version of a long-term policy is Permanent Health Insurance which, as the name suggests, will protect you permanently and can pay out a designated portion of your current income until you reach retirement age if the cause of loss of income is due to illness. There are also some insurers who offer medium term policies such as policies for 5 years and the type of cover you can choose will depend on the insurer.
One main difference between short term and long-term policies is the way they are underwritten. This is applicable for accident and sickness policies. The short-term policies are usually underwritten only when a claim is made which means the insurer will offer you a policy without going into any details of your medical conditions and you can buy them immediately. The long-term policies are underwritten before you buy them, and you will have to go through a detailed medical interview to be eligible.
Eligibility and Excess Periods
It is important to note that income protection policies have well defined eligibility criteria and you have to ensure that you meet all of them, failure to do so can result in the insurer not paying your claim.
You also have a choice in terms of excess days. Excess period is the number of days you will have to wait before you start accruing your claim. Best Insurance offers a wide range right from back to day 1 to excess of 120 days.
The products on offer can be quite confusing and knowing which one is best for you may be a challenge. Speaking to one of our financial advisers will help you to understand the policies, exclusions, any special terms and conditions and the fine print better!