What are the different types of income protection insurance?

money

There are seemingly almost as many different types of income protection as there are genres and sub-models of cars these days.

Or at least, it might seem that way depending on the terminology frequented by individual income protection insurance providers – as they leave many of us more than a little confused.

We still often see income protection being referred to in certain quarters as ‘permanent health insurance’ and ‘long-term disability insurance’ among many other pseudonyms.

It’s one thing (and many insurers do this) abbreviating income protection insurance to IP, that we get in this acronym-savvy society, but henceforth shall we just agree to refer to income protection insurance simply as that please?

Anyway, to set the record straight we have penned this quick, bite-size guide to what the different types of income protection insurance policies are and which sub-division works best for who and in what ideal set of personal circumstances.

For more information on everything to do with income protection insurance, read our great Buying Guide and FAQs on the below links:

What is income protection insurance?

In simple terms, income protection insurance essentially pays benefits to policyholders in the event of them being incapacitated to the extent that they can no longer carry out their normal employment duties; due in the most part to accident, illness or unemployment (typically through redundancy) unexpectedly befalling them.

There are generally just the THREE different variations on an accepted income protection insurance policy theme, and they are; Long-term Income Protection, Short-term Income Protection and Accident, Sickness and Unemployment cover. Or ASU if we’re insistent on using acronyms.

In the below guide we will spell out exactly what each of these three types of income protection insurance covers, highlighting the insurance industry acknowledged pros and cons of each.

Which if nothing else will hopefully make your life that little bit easier.

Especially from a financial viewpoint if you then go on to arrange one of these incredibly useful/highly recommended, consumer-friendly contingency plans.


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Long-term Income Protection

As the name suggests, long-term income protection can offer cover if you are unfortunate enough to become seriously or terminally ill, meaning that you would be unlikely to work for an extended period of time, or even ever again.

This type of income protection cover can continue to pay-out until you reach a pre-defined age or return to employment..

Being underwritten from the outset of the policy being drawn up, rather than when the you ultimately file a claim, long-term income protection insurance affords the policyholder the convenience and peace of mind that comes with knowing precisely what is – and is not – covered.

It also cites any pre-existing conditions of a medical disposition that you’re NOT insured against, for anyone unscrupulous enough to question this at a later date/if and when actioned.

Pros:

Longer periods of cover should you find yourself unable to work for pre-qualifying reasons.

Cons:

Lot of detailed paperwork to fill in at application stage, plus medical examination to undertake in most cases.

Short-term Income Protection

Again, fully underwritten and pretty much set in stone from day one of agreeing to the principles of the dedicated policy, short-term income protection plans remove the opportunity to argue over a clause, restriction, term or condition found within the legally-binding documentation later in its lifecycle.

However – and unlike long-term income protection – short-term income protection DOESN’T recompense policyholders until a return to work/retirement/death, and usually stipulates a fixed maximum pay-out period of anywhere between one and five years.

Pros:

Widely available to self-employed people as well as employees, at least in terms of accident and sickness sub-policies, while also ‘do-able’ for those on a fixed term contract, although pre-qualification conditions apply.

Cons:

It only provides a short-term, temporary solution to loss of income (typically 6, 12 or 24 month plans).

Can be difficult to obtain cover if you have pre-existing medical conditions.

Insurance providers can cancel with as little as 30 days’ notice; in the same amount of time they can also increase your premium if they so wish.

Accident, Sickness and Unemployment (ASU) Cover

This particular policy is highly recommended for those concerned about how they’d cope financially if they were to lose their job as a direct result of ill health or redundancy.

What differentiates it from both its short-term and long-term income protection stablemates is the underlying fact that you can arrange a plan which is specific to a debt, allowing for repayments to continue to be met despite suffering a blow to your health/employment status.

However, it’s worth noting that most ASU policies are time restrained and only pay out for a pre-defined and set period ranging from a few months to a couple of years, while the longer your cover lasts, the more accumulative the expense.

And don’t forget certain restrictions apply from the outset of any agreement being ratified, not least that you won’t be covered if you are found to already be at risk from unemployment when you’re instigating an ASU package.

Pros:

Your monthly premium will roll over month on month, until such time as the policyholder cancels the policy or makes a claim. This ensures that ASU insurance is easy to arrange and relatively informal in approach and administering on an on-going basis.

Cons:

Your mortgage and monthly outgoings determine your cover levels, and while the policyholder elects the amount any pay-outs are likely to be, they are capped at between 60 – 65% of your income.

Different income protection policy types

This isn’t the whole story though, as once you’ve decided on which of the three main types of income protection cover best suits your needs, you then have another decision to make – which type of policy to get.

Income protection policies are broken down into several different policy types: ‘guaranteed policies’, ‘reviewable policies’ and ‘age-related policies’.

Guaranteed policies

As the name implies, guaranteed policies ensure that the premium you pay remains the same amount for the full term of the policy.

Reviewable policies

These are subject to timely reviews and may result in increased premiums. Or possibly lower. Determined by economic markets, it’s a bit of a gamble, but could potentially work in the policyholder’s favour.

Age related policies

Thirdly there’s ‘age-related policies’ which accrue in terms of premium quoted every 12 months in recognition of the policyholder’s advancing years.

Out of the trio of available policy types, reviewable policies usually start out more cost-effective yet could work out more expensive over the medium to long term, while guaranteed policies tend to work in reverse.

Age-related insurance premiums on the other hand aren’t dictated by lifestyle choices (smoking, drinking, etc…) nor occupation, so are often sought by people who are willing to pay higher premiums in order to get quibble-free income protection cover.

Speaking of occupation, and naturally there’s a further factor which influences income protection insurance products across the board (excepting age-related-stipulated ones). That being what the policyholder does for a living, or rather what tasks they might be capable of resuming after convalescing after injury/illness, as opposed to the more common insurance deciding factor based on whether or not a certain role poses a greater risk than more stress/danger-lite vocations.

Again, there are a triumvirate of options from which to choose, including ‘own occupation’ (this policy provides cover in the event that you’re not able to perform your own specific job and  is likely to be the most expensive), ‘suited occupation’ (affords you protection if you’re not able to carry out a job’s remit that’s otherwise suited to the policyholder’s experience/skill-set) and ‘any occupation’ (which essentially means that you’re unfit to pursue any occupation, and is usually the least expensive cover).

What’s more, there’s additional bolt-on packages which come under the general umbrella of income protection insurance, which habitually include; mortgage protection, payment protection, loan protection and unemployment protection insurance, just to mix things up a little more.

And then consider the merits which come as part and parcel of each income protection insurance package, which – depending on the variety – can comprise rehabilitation assistance, terminal illness clauses, waiver of premiums and death benefit.

Again, scrutinising an individual income protection insurance policy in its entirety from the get-go will give you’re a clear indication of just what you’re receiving as part of your deal.

Oh, and as we hinted above, occupation is key to what sort of income protection insurance premium you’ll end up paying, as does your current standard of health (smokers, drinkers and couch potatoes beware!)

Although it’s not imperative across the board, many insurance providers will ascertain just what you do for a living and have collated a nice little risk category chart to give the beginner an idea of which they may fall into. Typically it pans out like so;

Class 1: Professional; managers; administrative staff; staff with limited business mileage; admin clerk; computer programmer; secretary

Class 2: Some workers with high business mileage; skilled manual work; engineer; florist; shop assistant

Class 3: Skilled manual workers and some semi-skilled workers; care worker; plumber; teacher

Class 4: Heavy manual workers and some unskilled workers; bar person; construction worker; mechanic

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