Obtaining the right income protection insurance can give security for your finances and family wellbeing. In the UK, we have many different types of protection products and providers to choose from. Therefore, it is important to understand what income protection insurance can do for you, how it works, how much cover to obtain and whether this is the right type of insurance for you.
This guide to Income Protection Insurance will outline all you need to know about this type of cover, including the following:
- What is Income Protection Insurance.
- What are the threats to your income.
- When should this type of protection be used.
- What features are available within this policy.
- What providers offer this type of cover in the UK insurance marketplace.
- What is the 7-step process to finding the right cover.
This independent guide will enable you to move forward with confidence and protect your income. If you still further questions about income protection insurance, please do get in touch to ask.
What is Income Protection Insurance
In the past, income protection insurance was also known as permanent health insurance.
The purpose of income protection insurance is to replace your income if you are unable to work due to being sick or injured.
Not to be confused with short term mortgage protection type policies, income protection can pay you a monthly income for two years, five years, or all the way through to retirement. The best policies can replace a whole lifetime of lost income if something awful happens to you and you do not recover.
An income protection policy will typically cover up to 65% of your income and can prove extremely valuable. For example, if you were 35 with earnings of £35,000 per year and then suffered a serious illness or injury causing you to be off work for the rest of your life; an insurance policy could pay you approximately £1,900 per month for the next 30 years. That would be worth £684,000 – a life changing sum of money.
Many features can be included in your policy. These affect the quality of cover (and the price), but give you the ability to tailor your policy to your own circumstances. The budget conscious may want to focus on what is essential, while those intent on getting the best cover for their income will go through the features to pick out what is important to them and get a comprehensive policy that best fits their circumstances.
What are the threats to your income
If you can’t work due to long term illness or injury, you still have to pay your mortgage, rent and other bills. Life doesn’t stop.
Income protection allows you to worry less about your money and focus on returning to health and work.
There are many reasons why you could be off work for a long period of time.
According to recent statistics*, the average age of claim is 40 years old and the top reasons for claiming are:
- Musculo-skeletal – 45% of claims are due to physical injury to the body.
- Cancer – 18% of claims are due to suffering from cancer. Another effective way to protect against this risk is through a critical illness policy.
- Mental illness – 10% of claims are from mental illness.
- Heart attack or stroke – 4% of claims are from heart attack or stroke, which is another issue where a critical illness policy can also provide effective cover.
- Neurological – 3% of claims are related to health issues affecting the brain, spine and nervous system.
- Other – The other 20% of claims are from a wide range of other health issues that can cause you to be off work for a long period of time. Unlike a critical illness policy which covers you for a set list of serious conditions, with an income protection policy there is no set list of reasons for being off work that the policy covers. If an illness or injury causes you to be off work for a long period of time; your income protection policy can be used to replace the majority of the lost income and ensure you can pay your bills and support yourself and your family.
*Source: Royal London Adviser 2019 Claim Statistics Report.
When should this type of protection be used
Income protection cover should be used as a core part of your protection needs. It is often overlooked for policies which pay out a lump sum, such as life or critical illness cover, but you are more likely to need to claim on an income protection policy than you are for life or critical illness cover.
A lump sum is more appealing as it offers clearer certainty on the value of the policy and is often used to clear debts, i.e. many people obtain insurance to at least clear their outstanding mortgage.
However, with an income protection policy you can keep your lifetime income more stable and help provide some financial security if you decide on a riskier employment path, such as becoming self-employed or a business owner.
Income protection should be considered as one of your first priorities, alongside life and critical illness cover to ensure you have the right types and amounts of cover in place for your own personal circumstances and financial risks to your wealth and wellbeing.
What features are available within this policy
Cover amount – An income protection policy typically covers up to 65% of your pre-tax earnings, or you can select a specific lower amount to help with the costs and at least ensure you cover your core bills.
Cover period – You can select a policy that will pay out a continuous claim until retirement, i.e. if you were off work from age 35 to 65 you would be paid for 30 years. Alternatively, a cheaper option limits the length of time a single claim can be paid to a period of 2 or 5 years. This type of policy allows repeat future claims, but it limits the cover payout for a single claim. I personally prefer the standard continuous claim policy but this can be a useful option if you are more budget conscious.
Deferred period – You can select a period of time that you need to be off work before you are eligible to claim on your policy. This can be as little as 1 week or up to 1 year. The longer the deferred period, the cheaper the policy, but make sure you have sufficient cash reserves or rainy day funds to cover the deferred period.
Guaranteed or reviewable premiums – You can have a policy where the monthly premium is guaranteed to not change each month. I like this option as it provides certainty over the cost of cover. Another option which typically offers lower costs at the start of the policy are reviewable premiums. This is where the policy is reviewed either annually or every few years and the cost increases in line with your age and the risks of this cover.
Indexation or level cover – Your policy can pay out a fixed amount of money, or the claim and premium can increase each year to help offset the costs of inflation and the potentially increasing household expenses.
Additional benefits – Many policies come with extras such as fracture cover, hospitalisation payment and back to work bonuses. some also come with death payments or terminal illness payments, and many now offer additional personal support to help you cope with your illness or injury. These additional benefits vary between providers and is an important consideration when selecting the right provider for your insurance needs.
Exclusions – There are a number of circumstances where an income protection policy will not provide any cover. The first one is redundancy/unemployment as this is a personal health related policy and not an economic related one. The other exclusions would be drug/substance abuse, criminal conduct, pregnancy/childbirth, or non-medical necessities such as cosmetic surgery. When you take out cover make sure you check the exclusions that apply so you fully understand your policy before proceeding.
What providers offer this type of cover in the UK insurance marketplace
As a practising IFA, I have access to the UK whole marketplace in order to find you the right policy. There are currently 13 providers in the UK offering income protection insurance. There are five friendly societies, one mutual company, and seven corporate insurance companies to choose from.
- The Friendly Society providers are British Friendly, Cirencester Friendly, Holloway Friendly, Shepherd’s Friendly and The Exeter.
- The one mutual provider is Royal London, which started life as a Friendly Society.
- The seven corporate insurance companies are Aegon, AIG, Aviva, Legal & General, LV=, VitalityLife and Zurich.
Choosing the provider which is right for you will in many ways depend on the features you prefer and the pricing, however some people prefer the structure of a Friendly Society or Mutual, while some prefer the financial strength and brand awareness of a large corporate company.
As there are many different providers in the marketplace, they compete for your custom which helps to bring down costs and also encourages innovation in the sector and the development of additional benefits beyond the standard core cover. Pricing often drives the decision on who to select as an insurance provider, but often it is the additional benefits and continued service standards that in my view are more important when selecting the right provider for your own policies. Like most things in life, cheapest is often not the best choice to make.
What is the 7-step process to finding the right cover?
The following 7-step advice process will ensure you obtain the right type of cover, with the best provider, at an affordable price.
The steps taken are as follows:
Step 1: We have a personal discussion of your needs and priorities. This usually occurs via Teams/Zoom/Telephone.
Step 2: Appraisal of your financial position to learn about what you own and what you owe, get to grips with your cash flow and understand the areas where cover could be needed.
Step 3: Complete a review of your existing employment benefits and protection policies already in place. I find that many people pay for duplicate cover and then leave gaps elsewhere. Or perhaps rely on employment benefits and then change jobs and lose benefits when they are older (and insurance is more expensive and difficult to put in place).
Step 4: Undertake independent research to select the most appropriate type of cover, amount of cover, with the best provider, and at the most cost-effective price.
Step 5: Present and explain your options so you understand the proposals.
Step 6: Confirm the recommended solutions in your own personal written report to back-up the understanding you have already gained and to fully outline the important features of the policy.
Step 7: Full assistance with completing the application and underwriting process until your risk is accepted by your chosen provider and your policy goes live.
All of the above steps can be provided without any direct upfront charge to you. I would be paid directly via the respective insurance providers for placing business with them and therefore there is no obligation to start this advice process. The cost of my advice and expertise is built into the regular monthly premiums.
Start the process to finding the right cover, with the best provider at an affordable price today.