What Is Income Protection?
Income Protection Insurance offers peace of mind and protection for your income. It means that if you are unable to work because of illness or injury, the policy would pay out a portion of your monthly earnings to cover your essential outgoings, usually 50-70% of your gross income.
These payments are tax free and can be used to cover your rent or mortgage payments, bills and day-to-day living while you get back to work. The best policies will continue to pay out for as long as you cannot work, or until you are of retirement age.
Assuming you choose own occupation cover, you will be covered for not being able to do your own job, rather than any job.
How Is Income Protection Different From PPI?
Income Protection is a more comprehensive policy which can cover all your essential outgoings in the event you lose your income due to illness or injury, whereas PPI would normally protect just the one outgoing loan or debt in the same circumstances.
PPI is usually short-term protection only and pays a claim for maximum one or two years regardless of whether you are able to return to work or not. A comprehensive long-term Income Protection policy will continue to pay your monthly income benefit until you are fit to return to work, or until you reach retirement age.
Income Protection allows you to know what you will be covered for at the outset with full medical underwriting. You would complete a full health questionnaire when applying for the policy, unlike PPI which would be on a moratorium basis. This means you would agree that any conditions suffered from in the past two years would not be covered. Your medical history would be considered at the time you make a claim, so you would not know in advance for sure if you would be covered.
Who Needs Income Protection Insurance or PPI?
Income Protection is perhaps one of the lesser-known protection insurance products on the market, but according to the UK’s consumer champion Which?, Income Protection is ‘the one protection product every working UK adult should consider buying’. It can be used to pay all your essential outgoings which your income would normally cover, such as your mortgage or rent, your utility bills and day to day living costs such as food. If you have essential monthly outgoings and don’t have indefinite sick pay from your employer – or enough savings to keep you going indefinitely – Income Protection is a good alternative to consider. PPI however will only cover the loan or mortgage you have taken out, so is only useful if you have a debt of that kind.
What Are the Chances I Really Need it?
Nobody likes to think about illness, injury or losing your job, but unfortunately it happens to lots of people, every year. Have you considered how you would cope if you were to lose your income? Here are some facts to consider:
- ‘Each year one million workers suddenly find themselves unable to work due to serious illness or injury’ (Welfare Reform for the 21st Century)
- Yet according to the Department for Work and Pensions Family Resources Survey, around 54% of households have either no savings or less than £1,500 savings and 76% have less than £10,000
- According to sick pay statistics in a government Health In The Workplace report: only 42% of small organisation employers offer any Occupational Sick Pay, which means the remainder would be left with Statutory Sick Pay (SSP)
- This means employers would pay you £109.40 a week after the initial four days of illness, up to 28 weeks.
- After the 28 week period – when SSP ends – if you are still unable to work – assuming you have paid National Insurance for two years or more – you are eligible to claim contributory Employment and Support Allowance (ESA) which is even less than SSP.
The Cost of Income Protection Insurance?
Income Protection premiums can be more than PPI, but it is difficult to compare them directly as Income Protection is a more comprehensive policy. There are also a lot of variables which affect Income Protection policy premiums. It is always a good idea to get a tailored quote from one of our expert advisers, based on your individual requirements and circumstances.
But here are some example quotes:
Some indicative example quotes:
- 25 year old Architect
- looking for a £1500 per month pay out amount
- with a three month waiting period
- full policy (meaning it will pay out until you return to work/retire)
= £18.89 per month premium
- 45 year old Architect
- looking for a £1500 per month pay out
- with a three month waiting period
- full policy (meaning it will pay out until you return to work/retire)
= £40.07 per month premium
What Other Options Do I Have?
When considering taking out protection insurance it is important to evaluate your circumstances fully and understand all your options. There are various different types of protection products available on the market and they can work in harmony with benefits from employers, state help and any savings you may have.
Savings
Understanding how much you have in savings and how long this would be able to support you for is important. You need to compare your current income with what your base level necessary outgoings would be. Things that seem essential may in fact become unnecessary in reality. None-the-less, findings from a Scottish Widows (2014) ‘Savings Report 2014’ found that 42% of households could survive only a couple of months on their savings and only 26% could survive one year or more. Whilst savings could be a viable option for some in the short term, realistically there are few who could manage to save sufficient amounts to secure sufficient income replacement long-term or until retirement with an average 30 year old likely to need in the region of £500,000 to last until retirement.
State Welfare
One of the most sited reasons for the uptake of Income Protection Insurance not being greater, is the general assumption that either your employer or the state will be there to support you if you were unable to earn due to illness. According to ABI ‘Welfare Reform for the 21st Century’ paper; ‘The UK welfare system is based on a fundamentally flawed assumption that households that will get little or no support from the state recognise this, and act to put in place their own safety net’.
Understanding the level of support you would receive from the state is confusing for some, impenetrable for others. It is affected by a number of factors including:
- Previous earnings
- Children
- Home owner (including with mortgage) or renting
- Other household earnings
- Household savings
This confusion can lead to people not understanding the level of support they would receive, which can be significantly less than previous earnings.
