Income Protection insurance
What is it?
When you take out Income Protection insurance, you are covered if you are incapacitated and unable to work due to illness or accident. This policy was formerly known as the Permanent Health insurance.
How much do you get if you are unable to work?
Income Protection payouts are usually based on a percentage of your earnings: 50% to 70% of your wage is what you would expect to get. Payments are tax-free.
IP policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the 'deferral' period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks.
Why would you need income protection?
With research provided by Unum and Personnel Today, it showed that only 12% of employers support their staff for more than a year if they are off for more than a year. With the lower amount of income from the government, income protection would give you enough of a wage to keep yourself afloat until you were able to get back to work.
What are the benefits to Income Protection insurance?
- Benefits are payable when the policyholder becomes incapacitated and after the deferred period has passed and continue until the earliest of death, recovery of health, retirement or the term of the contract.
- Benefits are paid regularly (usually weekly or monthly) and are free of tax.
- The insurance company cannot cancel or refuse to renew the policy provided that the policyholder continues to pay the premiums.
- A waiver of premium option may be provided whereby premiums for the IPI policy are not required while benefits are being paid from the policy, but the policy cover continues as normal.
What are the restrictions?
- The policies do not pay out if the policyholder becomes unemployed for a reason other than illness or accident.
- The deferred period is usually quite long, often a minimum of 4 weeks but perhaps as long as 52 weeks. Premiums decrease as the deferred period increases.
- There are a number of exclusions which apply to most policies, so that no benefits are payable for accidents or illness arising from events such as drug or alcohol abuse, criminal acts, intentional self-harm, wars and pregnancy.
- Due to the benefit limits, the maximum regular payment is usually restricted to prevent moral hazard – if the benefit exceeds the policyholder's income they have a reduced incentive to return to work once their health recovers.
- On change of occupation (or unemployment) of the policyholder the policy may become invalid, or the life office may require the premiums to be changed to reflect the new risk.
- For individual policies, as the benefits paid are not taxable income, the tax relief available to the policyholder may be reduced so, for example, tax relief on pension contributions is no longer available.
What are the different types of cover I can get?
In addition to standard fixed-premium Income Protection insurance policies there are a number of variations available from some different offices:
- Renewable Income Protection Insurance – renewable policies give the policyholder a right to renew the policy, possibly with an increase in cover, at a set period (often 5 years), based on the prevailing premiums for a person of their age and occupation. Premiums will initially be cheaper than a fixed IPI policy but will then increase each renewal as the policyholder gets older.
- Reviewable Income Protection Insurance – the term of a reviewable IPI policy will be the same as a fixed policy, but the premiums will be reviewed (and almost invariably increased) by the life office every few years, based on its general rates (not based on the health or claims of the policyholder). Initial premiums will then be cheaper than for a standard policy.
- Increasing Income Protection Insurance – the value of the benefit payable by a fixed-benefit policy is eroded over time by inflation so policies whose benefits increase are often more suitable. The benefits may increase at an indexed rate (such as the Retail Prices Index), a fixed percentage or by a percentage chosen by the policyholder every few years. For such increasing policies, premiums usually increase as well.
- Unit-linked Income Protection Insurance – other IPI policies have no investment element and hence no surrender value, however a unit-linked policy has an investment element similar to unit-linked life assurance policies. Premiums will normally be more expensive than standard policies due to the investment element, and could be still more expensive if the return on the invested premiums is poor.
- Group Income Protection Insurance – employers may provide a group IPI policy for their employees. For group policies a maximum payout period may apply and the policy will expire if the employee ceases employment with the employer.
What will we do?
When you contact us, we will arrange a meeting so we can establish what level of cover is best suited for you. Once we have discovered that we will go directly to the various providers to find out who can give you the best possible deal for your cover.