What Is Long Term Income Protection?
Long Term Income Protection is an insurance policy which covers your income. In the event you are unable to earn a living, due to becoming ill or suffering an injury, the policy will pay a regular, tax free benefit up to a maximum percentage of your earnings, usually around 50 – 70% of your gross income. A long term policy will continue to pay out until you are fit to return to work, however long that may be, or until retirement age if you never recover enough to work again.
How Long Is Long Term?
You can choose the term of your policy at the outset to suit you. Normally you would coincide the end of the policy with the age you plan to retire and thus when your pension would begin to pay out. So, for example if you protected your income until you are 66 years old and you became unable to work at the age of 45, your policy would continue to pay out an income benefit until you were able to return to work, or for the next 21 years until you were 66.
How Does Long Term Income Protection Work?
When you take out a policy, you agree to pay a monthly premium and the insurer agrees to pay out a monthly income benefit, should you become too ill or injured to work. Assuming you choose a policy with the ‘own occupation definition’, you will be covered for any health condition which stops you being able to fulfill your own specific job requirements.
All policies will have a ‘deferral period’- a predefined amount of time you will wait between first being off work and the policy beginning to pay out. At the point of taking out the policy, you can select a waiting period to suit your needs. Advisers can take into account any savings or sick pay benefits available from your employer, to calculate the right amount of waiting period for you. Waiting periods can be set for as short as one week. Once the waiting period has passed, the insurers would pay out your chosen monthly amount, while you are unable to do your job.
How Much Income Protection Cover Do I Need?
You can choose the amount of cover you require at the outset, when taking out a policy. You are able to protect a proportion of your gross income with Long Term Income Protection, not usually more than about 70%. 50 – 70% would be a typical amount – but don’t forget this is a proportion of your pre-tax earnings and the income benefit pay out is tax-free. You will also usually find that your essential outgoings would decrease if you were unable to work due to illness or injury. Your fuel or transport bill would be likely to reduce for example and exercise and leisure expenditure could cease. It is also a good idea to take into consideration your savings and how much that would help, when deciding how much cover to take out.
How Much Does Long Term Income Protection Cost?
Monthly premiums will vary depending on a number of factors. Some of those are your choice over the level of cover you require, others relate to your circumstances and will be out of your control.
- Your age – the older you are the more expensive your premiums will be because you are less likely statistically to become ill when you are younger.
- Your Occupation – higher risk jobs will mean a more expensive premium as you are more likely to suffer an accidental injury if you are a manual worker for example compared to an office worker.
- Choosing a longer waiting period or deferral period before the policy kicks in will mean a lower premium. This can be tied to any sick pay you may be entitled to from your employer, as well as any savings you have to tide you over.
- Term of the policy – whilst a long term policy would pay out until retirement or your return to work, there are cheaper policies available which cover you for a certain term only, for example one or two years.
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
Who Needs Long Term Income Protection?
According to the UK’s consumer champion Which? Income Protection is ‘the one protection product every working UK adult should consider buying’, however it can be overlooked and uptake is surprisingly low compared to some insurance products. If you are not sure if you need Long Term Income Protection, ask yourself the following questions:
- Do I have enough savings to live off indefinitely or until I draw my pension?
- Do I have sufficient alternative income (eg partner’s income) to live off indefinitely?
- Would employee benefits and state benefits give me enough to live off and maintain the lifestyle I would like?
If the answer is no, then it is worth investigating Long Term Income Protection. It is particularly important for those who:
- Are self-employed
- Don’t have Sick Pay benefits from their employer
- Do not have savings to fall back on
What Are the Chances I Need To Claim?
- ‘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.
What Does it Cover?
Unlike a Critical Illness policy, there isn’t a specific list of injuries or illnesses that a Long Term Income Protection insurance policy covers. If you are unable to do your job because of illness or injury, then you should be able to claim on the insurance. This could be because of a broken leg, a sports injury, a mental illness, an operation, a back problem etc.
Some figures on claims from the Association of British Insurers:
- Musculoskeletal is the biggest reason for individual income protection claims, followed by mental health and then cancer
- £60.5 million was paid out in Individual Income Protection claims for mental health with an average claim of £15,728
- 8 million estimated working days lost due to work-related ill health and non-fatal workplace injuries in 2019/20 Health and Safety Executive
What Does it Not Cover?
As long as you are completely honest with your adviser and there is nothing left undisclosed when you take out the policy, there shouldn’t be any reason why it doesn’t pay out when you most need it. However, as with all insurance policies, there will be some exclusions which apply to anyone. These are likely to include injuries or illnesses caused:
- As a result of travel to areas where travel is advised against by the Foreign and Commonwealth Office because of conflict, high terrorism risk etc
- As a result of criminal activities
- As a result of substance or alcohol misuse
Previous Conditions
If you have suffered from a medical condition previously, this could also be excluded from your policy. Each insurer has their own individual stance on how they will handle your circumstances, but if you have an existing condition, you can expect this to be reflected in the policy. You could:
- Have to pay an additional premium to cover the condition
- The condition could be excluded completely
- Some insurers may be happy to cover the condition completely, with no additional charge.
It depends upon each insurer’s appetite for risk as well as your individual circumstances. It is especially important to seek professional advice in this instance to make sure you have the best value and the most complete cover.
Long Term Income Protection Insurance only covers you if you are unable to work due to medical reasons, it does not cover you if you are made redundant. There are other policies available which cover for unemployment as well.
