Long term income protection

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Income protection insurance

How to save money on income protection

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Learn how to save money on income protection insurance with our special guide...

What is long term income protection insurance?

Although we never actively attempt to envisage what our lives would be like if a serious injury, illness or redundancy struck us without any prior warning, it pays to consider what might happen if such a life-altering situation were to befall us.

For a start our daily routines would change somewhat dramatically and quite possibly beyond recognition, as those affected (us and our immediate families) tried to adjust to the scenarios thrust upon us without invitation. And while emotionally this would mean major upheavals, there’s no denying that financially such an unprecedented event would trigger a chain reaction too. If your family depends on your income, then a serious illness, life-changing accident (and resultant injury) or unforeseen redundancy would send shockwaves through your personal finances, not least from the perspective of previously arranged and on-going repayment plans.

We’re talking primarily about mortgage and loan repayments, car finance agreements, credit and store card debts and the like, all of which unfortunately aren’t temporarily suspended if for whatever reason your main income stream is.

An unpredicted passage of indefinite time away from your place of employment could easily trigger the beginning of financial meltdown if you don’t have an alternative means of fiscal survival to help you through this period.

In a modern society we all have roofs over our heads, cars on our driveways and possibly children around the dinner table. We all need feeding, we all need clothing, while the utility bills which take care of our heating, lighting and access to water amongst other things need paying otherwise they’re cut off. Imagine how YOU might cope if your predominant/sole means of affording all this was cruelly snatched away from you for an undefined period of time. It really doesn’t bear thinking about does it? But there are contingency plans you can put into practice to safeguard your family, home, your car, your utility bills and means of continuing to provide for your loved ones should injury/illness or redundancy befall you; and it comes in the guise of long term income protection insurance.

This is a dedicated type of insurance plan which protects as best it can according to its remits the policyholder’s on-going financial interests while they’re laid up and not in a physical position to perpetuate their current employment. The reason for this could be because of suffering from a serious illness, being involved in a career-threatening accident or simply being made redundant. In each instance these events were un-meditated and could not be foreseen by the policyholder at the time they arranged their long term income protection policy.

Normally there are three areas you’re insured against happening which include; accident and sickness onlyunemployment only and the all-consuming (and more comprehensive – and therefore comforting) accident, sickness and unemployment cover.

Long term income protection can allow the policyholder to receive up to 70% of their gross salary should any one of the abovementioned and unwelcome series of events take effect. Essentially the policy is designed and structured to replace the policyholder’s income and pay-out the funds as a tax-free monthly sum; the provision of which will hypothetically reduce the impact of the financial hardship experienced if you are no longer able to hold down a job.

Often confused with critical illness protection insurance, long term income protection differs in as much as it offer broader coverage and its release clause isn’t dependant on the policyholder being diagnosed with a serious health/medical condition (which could invariably be classed as terminal) which is specifically cited on the insurance documentation. And which in some cases means that the insured is unlikely to ever return to work.

Another glaring difference is that for the most part a critical illness insurance policy will offer a one-off lump sum in the event of a claim being filed and agreed to, and one that’s not necessarily index-linked to their salary. As a general rule of thumb, critical illness insurance is related to the policyholder as an individual, whilst long term income protection is tied to the policyholder’s normal occupation as such.

In terms of schedule, a long term income protection policy is habitually set-up to come into effect the moment your employer ceases to afford you sick pay, and in theory will continue to recompense the insured until one of three eventualities pan out.

Those comprising the policyholder being in a physical position to return to work, the end of the policy term being reached or, sadly the policyholder dying. In previous guises long term income protection insurance was referred to as permanent health insurance, just in case you are more familiar with this classification or it crops up as this elsewhere.

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Do I need a long term income protection insurance?

You don’t have to, and we’re certainly not going to twist your arm into arranging one, however there’s no escaping the fact that long term income protection is one of the most useful types of readily-available insurance product on the market and one which you might be hard-pressed to live without should health/career matters take a sudden turn for the worse at one juncture or another.

Did you know that according to a recent survey that over 50% of the UK population have the financial means to be self-sufficient for just 17 days should they be hit by an unforeseen loss of income. So therefore you have to ask yourself these following questions in our opinion if you intend to do what’s right for you and your dependents.

  1. Could I survive on my savings indefinitely?
  2. Could I live off my partner’s/family’s income indefinitely?
  3. Would state benefits allow me to live in the way that I’m accustomed to?

If you can’t answer ‘yes’ to any of the above then the chances are you need to consider getting income protection insurance as a means to safeguard your personal finances.

If you think long term income protection insurance is for you then you must first determine the length of the policy term; which is of course the length of time that the plan pays-out for. In the majority of cases these benefit terms will pretty much run up to retirement age and in some cases beyond that. So effectively a policyholder could receive benefits from this policy – should they fall on difficult times – until 65-years of age and over.

Another fact you may find interesting is: according to statistics, someone who has been off work sick for more than 6 months has an 80% likelihood of extending that period of non-employment to 5 years. Which makes securing a long term benefit such as the one outlined here all the more sensible as a long term investment.

Addressing the issue of when policyholders can expect to claim on their long term income protection policy, and this is historically actioned once you’ve surpassed your deferred period. The deferred period in question being the length of time AFTER registering a claim before a bespoke policy starts to pay-out. This can be fairly wide-ranging, with periods of 4, 13, 26 or even 52 weeks being routinely signed up to by policyholders and tends to be based on just how long an individual can realistically survive, financially, on either savings, company sick pay or state benefits.

The advantage of staggering the deferment period to the farthest most point is purely to minimise the cost of the policy premium, which will appeal to many people from the outset.

How much does long term income protection insurance cost?

Annual/monthly premiums will be dependant as ever on a number of factors, not least the would-be policyholder’s age, occupation and payment periods as touched on above.

The younger the policyholder is, the less chance they are to succumb to illness and injury, a thought process which is duly reflected in lower monthly premiums, rightly or wrongly.

Following the same lines of applied logic, the less risks posed by your occupational hazards, the less premium you’ll pay for your policy. So office workers fare a great deal better than North Sea oil rig workers, for example. And as mentioned earlier, the greater deferred period before the claim payments kick-in, the lower the premium too.

According to long term income protection insurance experts, a policy with a 13-week waiting period will typically charge lower premiums than one with a four-week wait, simply because the insurance company’s costs will be lower. Interestingly, up until fairly recently (December 2012), women would traditionally have to stump up more for long term income protection insurance, because retrospectively there was a higher experience of claims for female customers. However, recent approved legislation deemed this unlawful in insurance practice and can no longer be applied to policies, emphasising once and for all that established gender differentials will not have a bearing on price in the future.

When it comes to fine-tuning costs and understanding certain criteria with regards to long term income protection insurance, it pays to be au fait with how a particular policy might define incapacity. That being the word (and the physical state of individual) which decrees which pay-outs are ratified at the point of claim and which could potentially be dismissed. Typically divided into the four main departments for want of a better word, namely ‘own occupation’‘suited occupation’‘any occupation’ and ‘activities of daily living’.

‘Own occupation’ means the policyholder is rendered sufficiently incapacitated (following injury or illness) to carry out tasks indicative of their own occupation and are not working in another job.

‘Suited occupation’ refers to the policyholder being unable to perform an occupation suitable to them (in light of their education and training) after incapacitation.

‘Any occupation’ covers the policyholder from performing any occupation at all, while ‘activities of daily living’ (or ADL) comes into play if – in the aftermath of an illness or accident – the policyholder is unable to carry out defined functions such as dressing and undressing, washing, eating, climbing stairs, shopping and cooking.

What can I do to reduce the cost of a long term income protection insurance?

Don’t economise on cover would be our advice. Although tempting to cut corners to lower premiums, this represents false economy and could easily end up in discovering that you have inadequate cover for some eventualities.

Also ensure that you consider all of your essential monthly outgoings, with direct reference to your mortgage, bills, council tax and food. Cheap long term income protection cover may seem a bargain in the short-term, but you could be on a hiding to nothing in the long term if you’re not careful.

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