What is Income Protection Insurance?
Income Protection is an insurance policy which pays you a monthly income in the event that you are unable to work due to accident or illness. The policy will pay out every month until you are able to return to work or the policy ends. The end date usually coincides with your retirement date although it can end before your expected retirement date if you choose. It does not necessarily need to cover your income in its entirety, an Income Protection policy can be used for example to provide an amount that will ensure you can pay your mortgage and bills without having to worry.
Why may I need Income Protection?
Most people will receive some sort of sick pay through work. This can vary from the minimum Statutory Sick Pay (SSP) upwards, generally speaking with larger companies, we tend to see a maximum of 6 months full pay followed by 6 months half pay as a maximum although we have once seen a company that pays out full pay for 24 months, but that is quite rare.
What happens after those 12 months? Most people have not thought that far ahead…
When your sick pay ends, you are reliant on state benefits. On a good day, that would be Employment and Support Allowance (ESA), on a bad day the assessment centres may decide your illness is not bad enough to be eligible for ESA which means you would not receive the support allowance. I am sure we have all read stories about seriously ill people not being eligible for ESA, if not there are a couple of links below.
You have heard it does not pay out?
This is a common misconception and something we hear regularly. According to the Association of British Insurers (ABI) 87.2% of Income Protection claims from all insurers were paid out in 2017. The average claim period in 2017 was around 6 years according to L&G (up to 6 times the length of time your employers sick pay may pay out).
With nearly 90% of claims being paid out, it goes to show that Income Protection is a valuable policy and it does indeed pay out.
It is too expensive.
The cheapest premium for income protection we have done is £11 a month. There are ways to keep the premiums down beyond reducing the monthly benefit amount. We can look at capping the policy end date so that the policy ends when you are 55 for example rather than the normal state retirement age of 65-67, we can extend the period before any payout is made or a combination of things. One of the things we try to do is to work within a budget, there is no point in taking out a £50 a month policy if that is not affordable, the idea is to protect your income.
Do I need Income Protection Insurance?
It is worth thinking about what would happen if you were unable to work due illness for a prolonged period of time? If we assume the average claim period of 6 years, what would happen during that period? Could you afford your mortgage or rent? Could you afford your bills? Food?
If you could cover your bills for a prolonged period of ill health, then you can potentially live without Income Protection.
If however your lifestyle would take a dip to some extent we can have a look at how much of a dip it would take and how much of a dip you are happy to live with. If your annual income is £50,000 a year and state benefits are say £10,000 a year, you are going to feel a £40,000 drop in income. If you had an Income Protection policy payout out £25,000 a year, added to the state benefits, that then gives you £35,000 a year which still means you are likely to take a hit on your lifestyle but it is probably a more manageable one.
You do not need to take out a policy to cover all of your bills forever. You may decide that £1,000 a month would ensure you can remain in your home and pay your bills without having to downsize or be a burden on family or even be reliant on state benefits.
We are big believers in Income Protection. Your income is the one thing that underpins everything you do. If you do experience a drop in income, you will still have bills to pay, commitments, in effect you are still an expense. It pays for the roof over your head, the food you eat, your bills, your holidays, your quality of life. Some of that can be reduced without too much effort, but other expenses will remain the same – rent or mortgage payments for example, council tax etc. Without an income or with a large drop in income, most people would take a hit in their quality of life.
We are happy to discuss your requirements and discuss your options if you think Income Protection may be of interest to you.
Please be advised that this post is making an assumption you would be eligible for state benefits of £10,000 a year and that the income protection would have no impact on that. When looking at your income protection policy we can also take a look at what state benefits are around.