How to choose the right income protection benefit period

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Nobody wants to consider – or more specifically, guess – how long they might be off work for should they sustain a serious injury or be diagnosed with a career-threatening illness or medical condition at some point in their working life.

Not unless that is they’re a serial pessimist who habitually views life with a glass half empty attitude as opposed to a half full perspective.

We all know the type. Someone who chooses not to warmly embrace a Monty Python-esque vision of looking on the brighter side of life, but rather adopts the more traditional ‘woe is me’ approach to everything.

Doom-mongers who often take relish in reminding us all that ‘life is short’ and ‘the end is nigh’, amongst other rent-a-quotes they love trotting out.

However, having said there comes a time in all our lives when we have to be realistic, pull our collective socks up and muster a more Dunkirkian spirit; especially when a major (and wholly unpredicted) injury or sudden onset of illness befalls us out of nowhere.

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Although it’s wise to do the prep work for (financially, if not emotionally) dealing with this unexpected situation when you’re in the rudest of health and seemingly fit as the proverbial flea.

The best way anyone can brace themselves from an as yet unsighted money and livelihood-compromising standpoint is to ensure that they have in place – and ultimately provide themselves (and their nearest and dearest) with – a financial contingency plan. And arguably the best plan of action in this specific instance is to arrange an income protection insurance policy. This can safeguard their finances and provide the monetary needs to help alleviate much of the strain which occur when you’re main income stream is threatened through no fault of your own.

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Yet the biggest outstanding question concerned with the ‘should I?, shouldn’t I?’ aspect of this hugely popular insurance product is the matter of time.

Or to put it more pertinently the choosing of the correct passage of time an income protection insurance policyholder should opt for from the outset, with direct regards to the perceived duration the unpredicted future serious injury or illness will manifest itself for.

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This in turn would determine just how long the insured party would require the paying-out of monthly benefit, the provision of which would serve as a crucial financial lifeline then and there.

Typically income protection insurance keeps paying out on the condition that the premiums continue to be met

Sadly this is like asking just how long a piece of string is and then proceeding to start unravelling a ball of the stuff, as there’s no simple way of knowing if and when you’ll succumb to an employment-hampering injury or illness, let alone try to distinguish the passage of time you’d need to recover in order to return to your existing role.

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So therefore you have to err on the side of caution and think about playing the long game just to be on the safe side. It’s also useful to engage in a little research to find out what the averages are in this instance…

According to one leading UK-based income protection insurer, 7 years appears to be the duration of the average claim honoured. Indeed, the risk of long term incapacity is much greater than any of us might otherwise have imagined.

What’s more – much more if you’re ever in the position of having to make a claim on it – the majority of income protection insurance policies cover a plethora of universally-recognised injuries and illness, including the often physically unseen (yet widely suffered) likes of mental conditions such as anxiety, depression and stress, along with chronic and recurrent back pain.

Experts insist that would-be income protection insurance policyholders should plump for a plan which doesn’t limit the payment period as such, citing packages which run until accepted retirement ages. But then there are variables which need to be fully considered before entertaining this notion, with projected costings being key amongst them.

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Income protection insurance products

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Individual budgets could well determine the length of the payment period, as it’s worth flagging up that the longer the duration of an income protection insurance plan (i.e, the point at which you wish the term to end) the higher the monthly premium charged.

As it stands with most income protection insurance providers, there are normally the four predominant cover options with reference to term length. These are 12, 24 and 60 month (for the short and fixed-term policies), up to 20 years plus for those looking for what’s referred to as a ‘whole of life’ plan (fixed term agreement can often range from 5 to 52 years, subject to age, for the record).

As a guide, it’s preferential to set the term length of the policy equal to either an acknowledged retirement age or the time when a mortgage is finally settled on the policyholder’s property. Alternatively for those selecting a more far-reaching end of policy life finishing line, income protection insurance claims could hypothetically extend until retirement looms if the insured party was unable to make a return to work.

Consider your regular financial outgoings to determine scope of your income protection policy

And then of course income protection insurance might not be everyone’s cup of tea, if they have other means to a transitional end in place. By this we mean group income protection insurance already offered as part and parcel of an employee’s benefits package, along with those who might have some type of critical illness insurance combined with another policy or tied to their mortgage which provides similar coverage.

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Failing that, some people could choose to fall back on their savings, although we’d urge anyone weighing up the pros and cons of this to think carefully about relying on their rainy day funds to cover their every financial need for a prolonged, and what could easily be indefinite, period of time before you’re back on your feet.

What people entering into an income protection insurance agreement must remember is that individuals

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aren’t necessarily tied to the policy for the period of time they sign-up to, but so long as they continue to meet the premium payments the plan remains in force.

The trick is not to underestimate the term of income protection insurance you might need, especially not to keep premiums low.

Traditionally you can insure in the region of between 50% – 75% of your gross annual salary, tax-free. Plus there’s never a fear of over-insuring (more than a proposer’s gross income) because insurance doesn’t permit policyholders to make a profit out of an individual’s misfortune and circumstances.

The best advice is to think long and hard about amounts of money you’d need on a monthly basis to make ends meet and keep up with any outstanding debt you may still be responsible for. This way you avoid the converse risk of underinsuring.

It’s imperative that anyone running the rule over income protection insurance first takes into account their essential outgoings; those things which comprise your biggest expenditure on a regular basis, such as mortgage payments, personal loans, food, utility bills and council tax to name but a few. These can never be underemphasised, particularly when it comes to longer term policies which have no pre-forecast completion date.

At the end of the day the actual length of time you elect to have an income protection insurance policy run over is up to the individual in question, with everyone’s circumstances and projected requirements (financially, foremost) being entirely different. It’s worth bearing in mind that protection packages such as these are designed to offer both short and long term safeguards and above all else continue to pay-out until such time as you are declared fit to return to the insured party’s workplace. Or alternatively, when the policy ends, retirement is realised or, and rather more tragically, the policyholder passes away.

Echoing the premise of life cover to a certain degree, income protection insurance monthly benefit is chosen by the proposer from the very beginning, prior to the contract being underwritten, with one of the differences being that each provider has a maximum percentage of gross salary which they will offer as a benefit. Everything else besides this (including the metaphoric ball) is therefore in the proposer’s court.

In summary:

Income protection insurance policies are designed to cover the individual as long as they’re in employment. Due to retirement plans here in the UK often varying in terms of when they kick-in, income protection packages instead allow the policyholder to decide at what specific age they’d like the plan to end. Once it’s legally ratified it will remain in force just as long as the insured party maintains their premium payments.