Income protection insurance – key facts you need to know

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By Bob Atoo
September 7, 2015

It’s never advisable to enter into something legally binding without first knowing the lay of the land. Think jobs, marriages, gym membership, PPI agreements and other things we’re more than likely to want to wriggle our way out of sooner rather than later.

If only we’d realised what certain aspects of any of the above-mentioned entailed BEFORE we said ‘I Do’ or signed on the dotted lines with the best of intentions from the outset then we perhaps might not have jumped at the initial opportunity so readily. But that’s human nature for you.

Arranging an insurance policy for most products is the same, and is something any expert in the field would always strongly urge interested parties to think long and hard about prior to committing the next 12 months of your life (or considerably longer in some cases) to the singular cause; albeit a good one which will wholly benefit you and yours if and when the time comes when you need to cash your chips in.
Income protection is one such insurance product which it makes absolute sense to be wiser about before the event as opposed to after it.

The ‘event’ being your sudden inability to continue fulfilling the professional role in the capacity of whatever your official job title happens to be.

This might have been involuntarily brought about by an unforeseen series of circumstances beyond your control, and which will have fundamentally resulted in you/the proposer/policyholder having nearly always sustained a serious injury, been diagnosed with a career-threatening medical condition/illness or been made redundant through no fault of your own. In fact, all these upshots have unpredictably materialised through no fault on your part; merely life dealing a sometimes savage blow completely out of the blue.

Imagine for a moment having your main income stream curtailed by an unexpected life event which ultimately compromises your capabilities of not just providing for yourself but your loved ones too. It doesn’t really bear thinking about does it?

However it’s no good going ‘all ostrich’ whenever the subject is brought up, as the quicker you make contingency plans on the off chance, the better for all parties.

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We say the ‘off chance’ yet in reality – and specifically why we recommend that you take out an income protection insurance policy at your next convenience – people sustain employment-threatening injuries and are told they have serious health conditions on a daily basis, and the law of averages says that you’re just as likely to succumb to one or the other (and don’t forget sudden redundancy for that matter) as the next person. Nobody is beyond susceptibility to whatever fate throws at us.

Income protection insurance is a percentages game as much as any other insurance product out there. But just take a few moments to remind yourself of some of these key figures before ruling it out…

38% is the percentage of income protection insurance claim cases (seemingly plucked out of the air) which the general public readily believe to be (very much wrong) paid out each year; when the fact of the matter is that the real figure is 90% plus. And continuing the number crunching were you aware that £8.4million is stumped up in claims pay-outs to income protection insurance policyholder from the UK insurance providers EVERY DAY? Which should go a long way to silencing all those negative vibes, as well as – more importantly – going an equal distance to ensuring that you and your family are financially catered for should the predominant breadwinner fall prey to injury/illness/redundancy. And did you know that the average income protection insurance pay-out is said to be in the region of £51,500 according to somebody who has ALL the facts at their fingertips; namely the Association of British Insurers (ABI).

Thankfully great swathes of the British populace has seen the income protection insurance light, with it being suggested by the experts that some 29 million of us have either a protection, term or whole life income protection in force, as of as recently as 2012.

So what are the core elements of income protection insurance, and what precisely is it? Thankfully we’re covering all the main bases here in sixkey areas requiring definition and explanation in layman’s terminology.

First up we look at ‘what income protection insurance actually is’ before we go racing ahead of ourselves and not to labour on the details too much it’s essentially an alternate means of keeping your head above water, financially, in the event of you losing your main source of regular income.  The income protection insurance will continue to be paid to the policyholder until such time as they are fully fit and able to return to work, reach retirement age or, more tragically, die.

In terms of monetary value it’s typically based on half to two-thirds (50% – 70%) of your gross annual salary which you were earning in the immediate lead up to your claim. What it definitely WON’T do is fully compensate for the exact sum of money you were earning at the time, to clarify. The reason for this is that a percentage will be subtracted in acknowledgment of the state benefits you are entitled to in this situation presenting itself, in addition to the income you receiving from the policy being recognized as tax free.

What do I need to know before signing-up for income protection insurance?

Well, it’s always handy to ask yourself if you REALLY need something first, and in the case of income protection insurance you might want to consider the following…

Do you receive group income protection insurance through an existing employer-based policy? If so, then this will cover pretty much the same areas as the personal variation on a theme we’re discussing here, so effectively it would be best to stick rather than twist. The same rule of thumb applies if you already have some form of far-reaching and all-inclusive illness insurance product in combination with another insurance policy or tied up with your mortgage, as otherwise you’ll be doubling up. Another consideration might be that you have accumulated enough savings over the years to counter a rainy day; however savings might not stretch to cover a long, drawn out and expensive indefinite lay-off triggered by a life-changing injury or illness. Also worth mulling over is the underlying fact that you may not be in a monetary position to afford income protection insurance premiums right now, as with some types (dealt with later) they can be pretty expensive on a monthly/annual basis. Plus, unfortunately, you won’t get a penny back when it’s run its pre-agreed course if you stay safe/well/fortunate and subsequently never need to claim on the policy. Pros and cons, as we refer to it.

Having said that, if you’re all set to go ahead and seek to arrange an income protection insurance policy then there are certain questions you must ask before putting pen to paper on anything. As anything you do or say now could be used in a court of la…….only joking. Yet in all seriousness it’s better to be equipped with ALL the info at this stage. Checking all the contract’s T’s & C’s are imperative, as you probably don’t need reminding, while you must be 100% sure about what you can and cannot claim for on this insurance product, alongside of being fully aware of when you can claim and being au fait with what you’re entitled to receive, from a financial perspective.

Mercifully protocol is in place which stipulates that all insurance providers produce policy documentation which is penned in plain, unambiguous English, so that you know precisely what you’re signing up to. Aside from this you need to ascertain what – if any – exclusions are in place (pre-existing medical condition disclosure predominantly, as well as determining if you are obliged to seek alternative means of employment if you can’t fulfil your previous role requirements etc…) and the passage of time you must acknowledge before the policy pays out (usually a minimum period of 4 weeks after cessation of work, although some deferment periods can last anywhere up to 2 years).

Incidentally, the longer the projected ‘waiting period’, the more competitively priced the income protection insurance premiums are likely to be. You’ll also want to find out how the insurer has assessed your role and how they might have arrived at deciding the risk factor incorporated (more of which later).

Next you must face up to your responsibilities, in as much as ‘disclosing to your income protection insurance provider things which they might need to take into consideration’, pre the agreement being underwritten and officially ratified by all parties.

As hinted earlier, this habitually means affording your insurer full details of both you and your family’s medical history, and not blatantly ignoring something which could well compromise your chances of a future claim being successful at a later date.

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Failure to come clean about past or recurrent health implications which may crop up again will affect pay-outs and potentially invalidate an existing policy, so it’s always best practice to reveal anything and everything from day one. Disclosing pre-existing conditions (of which they are colloquially known as) may come at a (premium-increasing) price to the proposer, but for the sake of a few quid more a month why put any sizeable future claim in the balance, especially at a time when your financial life (and those of your nearest and dearest) could depend on it.

Aside from current (and previous) health status clarifications, you’ll be required to inform them of any risk factor connected with the role you do for a living, while also you’ll be routinely asked by an income protection insurance provider as to whether you regularly participate in any perceivably dangerous hobbies and pursuits. We (or rather they) are talking about skydiving and pot-holing and not stamp collecting or ornithology, for the record. Lifestyle questions will also be put to you and expect to answer examples which determine if you are classed as a heavy drinker, smoker or drug taker, while your weekly fitness activity levels might come under the spotlight too.

One of the most important things you’ll need to ascertain is what level of income protection insurance cover is best for your personal circumstances? The answer is relatively straight forward for the most part, in as much as it notably depends on what you can afford. Which is fundamentally based on what you earn, which is the crux of this matter.

Ideally you begin with what your take home pay is in your current role, deduct what you would receive in state benefits if you were incapacitated for a lengthy period, subtract any work-related costings (e.g. travel, food, clothing) and then add any extra expenses you might require if you became seriously ill/injured (extra heating costs, medical equipment purchase etc…). We know it’s purely hypothetical at this juncture but does afford you a rough idea. Once you’ve done this you need to run the rule over the 3 predominant types of income protection insurance policy which are outlined below, to work out which works best for your particular (if still only theoretical) needs.

Long-term income protection

Pays out until such time as you reach a fixed age, return to work or pass on, and is underwritten when applying for the policy as opposed to when making a future claim. Learn more about long term income protection >>>

Short-term income protection

Like long term income protection, this type of policy is fully underwritten when you take out the cover, yet differs in as much as it has a fixed maximum pay-out period of normally between 1 and 5 years in duration, rather than continually recompensing until retirement or death do you part company with it. Learn more about short term income protection >>>

Accident, sickness and unemployment (ASU) cover

ASU providers may screen potential customers, but do not demand comprehensive medical underwriting as part of the application process, while cover tends to be cheaper than long-term variant. Downside is you’ll have less certainty regarding coverage when you come to put in a claim. Also, and as the name implies, ASU policies cover you for episodes of unemployment as part and parcel of its remit. Learn more about Accident, Sickness and Unemployment cover >>>

What factors impact on how much my income protection insurance premiums will be

The premium costs of income protection insurance are based on your age (the younger, the cheaper the policy premiums are), your gender (men could pay slightly more, on account of making more claims), your health (the better the shape you’re in, the more cost-effective the policy premiums), your job (the riskier, the more expensive), hobbies and lifestyle (base jumping borderline alcoholics take note), the deferment period (the longer you put off claiming directly after being diagnosed with your injury/illness, the cheaper the premiums) and what other types of employment you might consider other than your own in this situ. And with reference to anything else you might need to know (and in relation to the last point brought up here), you can’t claim income protection payments immediately after falling ill or become incapacitated. You usually have to wait a minimum of four weeks, but payments can start up to two years after you stop work. This clause is due in the main to policyholders may not requiring the money in the direct aftermath as you could be eligible for company sick pay and/or you may be able to claim statutory sick pay for up to 28 weeks after you cease employment.

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