Income protection benefit limits explained

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A world without any limits might sound exhilarating on paper (or screen), but it would soon descend into anarchy as visually portrayed by Hollywood on a regular basis. It’s simply not a viable premise whichever way you look at it; commercially, emotionally, morally, ethically, sociologically and probably a few other ‘ally’s’ that we can’t quite remember right now.

Limitations are there for all of our goods (and services) and without which the very fabric of society would risk crumbling and self-imploding in no time at all, as chaos reigned. And amid the obvious concerns about the imminent dismantling of all that we know and hold dear, the insurance industry would cease to exist too. Probably not your first concern when facing up to Armageddon, but worth mentioning all the same in this doom-mongering contextual surround.

Mercifully we’re not stood on the very precipice of the final days of humanity (not as we pen this rough guide, anyway), so insurance – like the world at large – remains safe and sound and in good hands.

But that’s not to say various aspects of it aren’t guarded and impose its own restrictions and well-documented limitations.

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Take income protection insurance for example…

Income protection benefit limits exist chiefly to determine the maximum amount of money a policyholder would expect to receive should they suddenly find themselves incapacitated. However problems begin to arise when policyholders struggle to comprehend certain aspects of the package regarding financial entitlement. Not least should their typical earnings come up short of the maximum amount of income protection benefit for which they are insured; after which disappointment will always ensue when policyholders become aware of the actual level of monetary recompense on the table in this instance. And therein lies the rub. The more you are earning at the time you’re unpredictably incapacitated and unable to continue your job, then the more money you’ll receive (albeit percentage-wise) after the event.

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Being able to claim on your income protection insurance policy is triggered by the immediate onset of, normally, one of three things which could easily be sent to test us at various points in our lives.

These are serious injuries, equally serious and potentially life-changing/threatening illnesses and sudden unemployment; any of which can leave the individual bereft in a host of emotional as well as physical ways.

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Yet financial question marks hanging over your immediate and long-term future needn’t add extra worry to your now dramatically increased load, providing you have a suitable income protection insurance plan in place.

In terms of benefit limits (essentially the amount you’ll be paid out on an on-going monthly basis until such time as you are deemed fit to return to your job/normal place of work – or reach the end of said income protection insurance agreement cycle if it’s a short-term policy you arranged/find alternative other employment/tragically die as a result of the aforementioned serious injury/illness), then this is effectively governed by the type of package the policyholder signed-up to in the first place.

The type of income protection insurance plan plays a key role in determining just how much is paid out should a claim be filed, with short-term versions typically recompensing for up to 12 months at a time and in most cases affording the policyholder cover for a maximum limit of 65% of their gross (pre-tax) income. Although in recent times this cap has been upped by some policy providers to the 70% mark.

With regards to long-term protection policies (which historically continue to pay-out until retirement or the above circumstances – whichever happens first), and it’s also more than plausible to receive cover up to 65% of your gross earnings, depending on which insurers you choose to go with. That said, the maximum income protection insurance benefit limit in this particular field is more often than not set at the 50% of gross earnings mark, with a few select companies flagging up alternative percentage limits somewhere between the two figures.

With this in mind – and to instigate all income protection insurance providers you approach for quotes to offer you competitive prices – it’s imperative to set your cover limit at 50% of pre-tax earnings, as a realistic ball-park figure.

That’s not to say you shouldn’t necessarily aim for a higher percentage figure if you’re of the opinion that you really do need the additional cover in the event of you lodging a claim (on account of existing financial outgoings such as mortgage and loan payments for example).

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Admittedly it’s all too easy to look at the maximum amount of cover that can be arranged with an income protection insurance provider from the outset.

That’s especially the case given the income limit imposed by many, yet in our experience we would always advise people to sit down and think long and hard about just how much cover you really need at the end of the day.

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Put it this way, if you work out your monthly expenses to be in the region of £1,500, does it make any financial sense to burden yourself (payment-wise) with paying premiums on a figure of £2,000’s worth of income protection cover?

As opposed to dwelling on an income target, it would be preferential to instead concentrate on how much cover you require in terms of routine monthly outgoings first and foremost.

The important aspect is ensuring that you have a decent income protection insurance policy so that you can essentially safeguard your earnings in light of you career being compromised by the untimely and un-forecast advent of employment-risking injury or illness. And not just these potentially financially destructive scenarios but that posed by the very real threat of unemployment during these far from comfortable and secure economic times where people’s livelihoods are sometimes impacted at a moment’s notice through no fault of their own.

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Here at Bobatoo we work with a host of leading income protection insurance providers to help find you a great deal.

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