Do I really need income protection insurance?

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It’s one of the big questions people often ask. OK. Not quite as routinely as, “Does my bum look big in this?” and “Does ANYONE recognize ANY of the housemates on this year’s Celebrity Big Brother?”.

Nevertheless the question, ‘Do I REALLY need to arrange an income protection insurance policy?’ does have a tendency to crop up in a lot of conversations (or maybe it’s just us?). And if it doesn’t, trust us, it’s worth your while to ensure that it does if you wish to avoid potentially finding yourself out of pocket sometime in the future.

Admittedly, the prospect of something bad unexpectedly happening to you further down the line is not something anyone wishes to dwell on (or even causally think about to be perfectly honest), however nobody is immune to sustaining a serious injury out of the blue or being struck down with a lifestyle (and moreover, work)-compromising illness or health-impinging condition; which essentially might impact on everything. Which is ALL the more reason why you need to address the business of income protection insurance if you haven’t already.

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Er, What Is Income Protection Insurance When it’s at Home?

Well put it this way, it’s got nothing to do with ‘home’ insurance before we go any further, turn of phrase or not. Instead it’s got EVERYTHING to do with safeguarding your personal finances and accepted way of life in the event of the worst case scenario befalling you.

Short of actual Armageddon, the chances are (as we mooted above) you could be laid up for an undefined passage of time in the foreseeable future due to a wholly unpredictable injury or illness appearing out of nowhere. And just imagine how you (and your loved ones) would cope if you were suddenly unable to work, and subsequently had your income stream curtailed.

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Have you ever spared a thought for how you might subsequently manage?

Would you really be able to live off your savings (providing you had something set aside for a rainy day in the first place)? Could you rely solely on sick pay (or any other state benefits which you might qualify for)?

Think about it. The mortgage will probably still need paying, as will the car finance, loans, credit cards, utility bills, kid’s schooling, etc, etc.

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Have you thought how you would cover all this without a regular and secure income coming in each month?

So Come on, What Exactly IS Income Protection Insurance; Spill the Beans?

To cut a long story short, income protection insurance is typically a long-term insurance plan to help the policyholder out (from a financial perspective at the very least) should they find themselves unable to continue their normal means of employment because of unexpectedly suffering an injury or being diagnosed with a serious medical condition.

Effectively an income protection policy replaces a significant percentage of your income if you can’t work for the reasons stated above; and can extend to cover the onset of disability and being made redundant via individual policy features you can traditionally opt in or out of.

Income protection insurance will pay-out until such time as the insured party is in a fit and able state (of both body and mind, depending on the condition from which they’re suffering) to make a full return to their place of work. Or alternatively reach the end of the policy term. Or more alternatively retire. Or even more alternatively (and suffice to say, tragically) pass away.

How Many Times Can I Claim on an Income Protection Insurance Policy?

As long as it’s within the agreed term of the policy (known as the ‘benefit period’), in most cases the insured party is entitled to claim as many times as needs be.

What Illnesses Does Income Protection Insurance Cover?

Rest assured, the majority of illness and health conditions which are medically proven to compromise a policyholder’s ability to work (either in the short or long-term) are covered. Although it’s imperative that interested parties always read the policy small print beforehand to determine specific policy features and confirmation of incapacity definitions.

Of course you could think about taking out critical illness insurance instead, however critical illness only covers a (very) limited range of illnesses and for a shorter period of time than its income protection counterpart, just for the record.

Is There a Choice of Income Protection Policy Types?

Yes. There’s what’s called guaranteed policies, reviewable policies and age-related policies from which to choose, whilst if you don’t wish to plump for a long-term income protection plan you can arrange a short-term variation on a similar theme.

What’s a Guaranteed Policy, then?

If you elect to go with this particular plan then the premium you pay remains unchanged throughout the lifetime of the policy, unless that is you decide to increase the level of cover available. Although generally perceived to be the most expensive form of income protection at the point of purchase, over the longer-term it could well prove to be the most cost-effective according to experts.

So that’s a Guaranteed Policy; what’s a Reviewable One?

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As the title implies, a guaranteed income protection insurance policy is subject to regular reviews at timely intervals in the course of the pre-agreed term, and can therefore alter at various junctures based on age or health pivots (all of which would be clearly explained to you on sign-up).

Whilst this type of policy normally tends to start off cheaper (in contrast to the above), there’s a distinct possibility that they can wind up more expensive in the long run; and as the ever-changing goal posts are perpetually moved.

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And Finally, What About the Age-related Income Protection Plans you mentioned earlier?

These are in the habit of seeing premium hikes year-on-year, reflecting the policyholder’s increasing age through the term. Age-related policies do have their advantages though, and therein prove popular amongst the demographics who are more likely to claim over subsequent years. Think smokers and those who are employed in high risk professions for example.

And You Also Said Something About Short-term Income Protection Plans?

You’re right, we did. This policy type provides protection for a pre-fixed amount of time, as opposed to an on-going timeframe which is only ever ended by the policyholder’s return to pre-accident/illness fitness (and ergo, work), reaching retirement or death. Or of course an actual end date being witnessed. In the aftermath of a successful claim being made on them, short-termers pay-out for six months to a year max, mostly.

Forgive Me, But the Initials Sound Similar to PPI. I Assume Income Protection Insurance (IPI) is NOTHING Like Much-maligned Payment Protection Insurance?

You bet it isn’t. In fact, it’s the polar opposite. Payment Protection Insurance (or those three dreaded letters, PPI) is a form of (increasingly) outdated income protection that provides cover for loan repayments and/or minimum monthly credit card payments should you be unable to work. But the big difference – let’s be perfectly clear – is as follows: Where PPI covers a particular debt (and any pay-outs forthcoming go to your lender), income protection hands you a tax-free percentage of your income if you’re unable to work due to illness or injury.

How Much Can I Realistically Expect to Pay for Income Protection Insurance?

The amount you’ll pay differs from person to person and situation to situation and will vary largely based on a number of variables.

Ostensibly the would-be policyholder’s premium will be dependent on many factors including age, medical history (and that of your immediate families so as to ascertain if there’s any hereditary conditions the insurer needs to be made aware of from the outset), occupation and whether or not you’re a smoker (or heavy drinker). All this and more will be taken into account before any premium quotes are bandied about.

Should I Be Aware of any exclusions?

It’s always wise to be mindful of all terms and conditions before entering into any contractual agreement with regards to a personal insurance policy of any description, and those considering signing up to an income protection policy should approach the task with the same mantra. Remember, the last thing you want to do is risking a plan becoming invalidate when claimed on (and therein needed the most), which is a scenario which might play out if you are found to contravene any previous disclosures you have made. Typical income protection insurance exclusions to wacth out for include the following;

  • Any pre-existing medical conditions which you were aware of before taking out a policy
  • Disabilities (or illnesses) as a result of a criminal act
  • Any self-inflicted injuries
  • Pregnancy
  • Alcohol or drug abuse

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