Income Protection Cover

What is income protection insurance?

Formerly known as permanent health insurance, income protection is an insurance policy that pays out if you’re unable to work because of injury or illness.

Income protection usually pays out until retirement, death or your return to work, although short-term income protection policies, which last for one or two years, are also available at a lower cost. Neither income protection or short-term income protection pays out if you’re made redundant – but they will often provide ‘back to work’ help if you’re off sick. Income protection is different from critical illness insurance, which pays out a lump sum if you fall seriously ill. 

Why do I need income protection insurance?

Only a minority of employers support their staff for more than a year if they’re off sick from work.
Given the low level of state benefits available, everyone of working age should consider income protection. But when we asked the public, just 9% said they have some form of income protection, compared with 41% who have life insurance and 16% who have private health insurance.
The one protection policy every working adult in the UK should consider is the very one most of us don’t have – income protection.

How much does income protection cost?

Your health, whether you smoke and level of cover needed will weigh into your premium, but your type of job also plays a major part in determining what you’ll pay. Many insurers group jobs into four categories of risk, though some have more. For example, jobs may be divided into the following groups:

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.

The riskier the type of job you have, the more likely it is that you may need to make a claim. Therefore, those in the riskiest occupations tend to pay higher premiums.

How much does income protection pay out?

Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Sometimes, an insurer might pay out a higher percentage of one portion of your salary (perhaps the first £50,000), and a lower percentage on anything above that.  For example, say you earn £40,000 a year, and you take out an income protection policy designed to pay out 60% of your salary.  Over the course of a year, your policy will pay out £40,000 x 60% = £24,000.  The good news is that payments from income protection policies are made free of income tax.

When does income protection pay out?

Income protection policies pay out only once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the ‘deferral’ period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks, but it can sometimes be as low as four weeks. How an income protection insurer defines your inability to work will also influence if and when your income protection policy pays out.  There are three methods insurers use: activities of daily living, suited occupation, and own occupation.

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