Income Protection Insurance

Income Protection is an insurance policy that will pay a tax-free income to policyholders who are incapacitated and hence unable to work due to illness or accident.

It provides long-term income security and usually has a deferred period of up to 12 months, depending on the preference of the policy holder.  Another name for income protection insurance is Permanent Health Insurance (PHI).

Who Might Need Income Protection Insurance?

If you are ill or have an accident and cannot work, how would you cope without an income? How would you pay your mortgage or rent and cover general living expenses?  Many people believe that the state (government) will look after them but the reality is, basic Statutory Sick Pay (SSP) is only around £80 per week.

The last thing you want if you are unable to work because of illness or an accident is the financial stress that comes with not being able to pay the bills.  Generally, income protection policies pay out for more conditions than critical illness insurance and will continue to pay out until the end of the policy term (often up to the age of 70) or until you can return to work.

Main Benefits of Income Protection Insurance

Different polciies and different providers offer different benefits, but below is a list of the main benefits of income protection insurance:

• Benefits are payable when the policyholder becomes incapacitated and after the deferred period has passed and continue until the earliest of death, recovery of health, retirement or the term of the contract
• Benefits are paid regularly (usually monthly) and are free of tax
• The insurance company cannot cancel or refuse to renew the policy provided that the policyholder continues to pay the premiums
• A waiver of premium option may be provided whereby premiums for the IPI policy are not required while benefits are being paid from the policy, but the policy cover continues as normal
• Offers flexibility of term - usually anywhere between 5 - 52 years (up to the age of 70)

Things To Consider When taking out Income Protection

• Policies do not pay out if the policyholder becomes unemployed for a reason other than accident or illness
• The deferred period is usually quite long, ranging from 1 - 12 months. Premiums decrease as the deferred period increases
• There are a number of exclusions which apply to most policies, so that no benefits are payable for accidents or illness arising from events such as drug or alcohol abuse, criminal acts, intentional self-harm, wars and pregnancy
• The income payable from the policy cannot exceed the income the policy holder was earning before they became incapaciated.  The amount payable takes into account Statutory Sick Pay and the fact that the benefits from the insurance policy are tax free.  This usually translates into a maximum of 50% - 65% of pre-tax earnings
• On change of occupation (or unemployment) of the policyholder the policy may become invalid, or the insurer may require the premiums to be changed to reflect the new risk
• For individual policies, as the benefits paid are not taxable income, the tax relief available to the policyholder may be reduced so, for example, tax relief on pension contributions is no longer available
• Policies do not provide health insurance, death benefits or critical illness cover, so health insurance and/or life insurance and/or critical illness cover may also be needed by the policyholder

How Can I Get Protected?

When taking out any type of protection cover, it is important to think about what you would want to happen in unforseen circumstances.  With so many possible solutions and providers, the research and decision making process can be time consuming and confusing.

This is why we recommend that you speak to a qualified and independent financial adviser or insurance broker to ensure you are aware of all the options available to you.  You may want to speak to some of the various insurance companies that offer Income Protection Insurance, but by speaking to an independent financial adviser or insurance broker, they can reseach the whole market for you and advise based on your needs.

Useful Links

>>> Benefits of taking out cover through Money Minds
>>> Income Protection Questions & Answers
>>> Speak to an Insurance Adviser (quotes & enquiries)
>>> Life Insurance Cover
>>> Private Medical Insurance
>>> Critical Illness Insurance
>>> Mortgage Protection Insurance
>>> Mortgages