- What is Income Protection insurance & is it the same as PPI?
- How much does Income Protection cost?
- How much & when does Income Protection pay out?
- What is 'Own occupation' & 'Index-Linked' Income Protection
- What is 'Age-Banded’ & ‘dual-deferred’ Income Protection?
- What is Accident, Sickness and Unemployment insurance & is it subject to tax?
- What else does Income Protection cover?
What is Income Protection insurance & is it the same as PPI?
Income Protection offers a replacement income if you’re unable to work because of an accident, injury or sickness.
A ‘Full-Term’ Income Protection policy normally pays out a replacement income until either you reach your retirement age, you die, or you return to work.
A ‘Short-Term’ Income Protection policy will provide a replacement income for one, two or five years per claim, and are usually available at a lower cost.
Income Protection won’t pay out if you’re made redundant – but 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 become critically ill.
Income Protection is NOT the same as the widely mis-sold payment protection insurance (PPI).
Where PPI covers a particular debt and any payments go directly to the lender, Income Protection provides you with a tax-free replacement income if you’re unable to work because of illness, accident or injury.
Why do I need Income Protection insurance?
Very few people receive enough support from their employers if they’re off sick from work. Those who are self-employed wouldn’t receive any Sick Pay at all.
Because State Benefits are unlikely to provide you with enough each month to cover your bills, let alone maintain your lifestyle, everyone of working age should consider an Income Protection policy.
Your income is the thing by which you pay your rent or mortgage, your mobile phone bill, its what puts food on the table each month and keeps the lights on.
If your income stopped, what impact would this have on you and your family’s lifestyle?
The one protection policy every working adult in the UK should consider is Income Protection.
If you’re looking to take out an Income Protection policy, it pays to take professional advice. Call Plus Protect and ask to speak to one of our advisers for an Income Protection plan built around your needs.
Call us on: 01564 79 11 79
How much does Income Protection cost?
Your medical history, whether you smoke and the level of cover you need may have an impact on the premium you pay, 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.
However, Plus Protect work with several insurers that disregard occupation and whether you smoke, meaning that you could pay the same as someone who represents a much lower risk.
Income Protection often costs less than a cup of coffee each day but could make all the difference to your situation; enabling you to maintain your lifestyle and meet your liabilities as they fall due.
How much & when does Income Protection pay out?
How much does income protection pay out?
The replacement income paid by an Income Protection policy is usually based on a percentage of your earnings: often around 60% of your gross annual income – although this differs from provider to provider.
Sometimes, a provider might pay out a higher percentage of one portion of your salary (perhaps the first £50,000), and then a lower percentage on anything above that.
For example, if you earn £40,000 a year, and you take out an Income Protection policy designed to pay out 60% of your salary, over 12 months your policy will pay out £40,000 x 60% = £24,000 or £2,000 a month replacement income.
Best of all, the payments from Income Protection policies are paid net, meaning they are free of income tax.
Plus Protect can guide you on what each provider would be prepared to pay in order to find a level of benefit that works for you.
When does Income Protection pay out?
Income Protection policies pay out once a pre-agreed amount of time has passed since you stopped being able to work. This is known as the Deferred Period.
Normally, the longer the deferred period you choose, the lower your premiums.
This deferred period can range from as little as 1 day to over 12 months and all depends on how much sick pay benefit you receive from your employer, or in the case of a self-employed person, how long you feel you could remain without your income.
When determining the deferred period on an Income Protection policy, you should always check with your employer to see what sickness benefits they pay. The deferred period should ideally coincide with when any sick pay benefits end.
How an Income Protection insurer defines your inability to work will also influence when your Income Protection policy will pay out. We advise most clients to take out cover on an own occupation basis, which we’ve explained below.
What is 'Own occupation' & 'Index-Linked' Income Protection
‘Own occupation’ Income Protection policies do what they say on the tin – they pay out if you can’t do the job you currently hold at the point of making a claim.
This type of Income Protection provides the highest level of protection should you get ill and be unable to do your job.
Index-Linked Income Protection
Inflation is an important thing to consider when taking out an Income Protection policy.
Each year, the cost of living tends to increase, and you’d like to think that your salary would too!
If you don’t account for this, you might find that the replacement income from your policy hasn’t kept up with a rise in living costs and may not be sufficient to meet your needs. This is because the amount of replacement income benefit you can claim would have been linked to your salary at the time you took out your policy.
An Index-Linked policy is designed to increase each year in line with the Retail Prices Index (RPI) to counter the effects of inflation and to ensure that any replacement income benefit you receive remains suitable for your needs.
On an Index-Linked Income Protection policy, both the amount of cover and your premiums rise slightly each year.
What is 'Age-Banded’ & ‘dual-deferred’ Income Protection?
Age-Banded Income Protection
Age-Banded Income Protection is a type of policy that starts with a ‘discount’ and then increases in cost each year. These types of policies are designed to help those looking to arrange cover on a budget.
This cover usually starts out cheaper than an Income Protection plan that comes with fixed premiums but then rises steadily each year as the policyholder gets older.
It often takes 10 or more years for these policies to reach the same monthly cost as those with fixed premiums, so offer a very practical alternative to those looking for cover in the short-term and on a budget.
However, towards the end of the term and as the price increases with age, these policies can end up costing considerably more each month than those with fixed premiums, so you should always seek advice in this area.
Dual-deferred Income Protection
A dual-deferred Income Protection policy is particularly important for public sector workers, NHS staff or anyone that receives ‘stepped’ sick pay benefits, such as 6 months full and 6 months half pay.
In a dual-deferred scenario, such as the one shown above, half of any replacement income benefit would be paid when your income halves so that the financial impact to you is limited and then the remaining amount when your sick pay benefits stop completely.
What is Accident, Sickness and Unemployment insurance & is it subject to tax?
Accident, Sickness and Unemployment policies (ASU) are usually a cheaper alternative to Income Protection and like Short-Term Income Protection policies, they’ll typically provide cover for around one to two years but no more.
The main difference with ASU policies is they’re sold without full medical underwriting – which means you have less certainty that you’ll be covered when you put in a claim.
Depending on your preference – you can choose to buy a policy to cover you in the event of Accident, Sickness or Unemployment.
Will the income I receive be subject to tax?
No. Payments from Income Protection policies are made free of income tax.
Income Protection is treated as ‘unearned income’ so may affect the amount of level of state benefits you’ll receive
What else does Income Protection cover?
Income Protection policies will often come with a whole range of benefits beyond the replacement income. These are some of the additional features and benefits you may encounter:
Some policies pay you a proportion of your Income Protection if you go into hospital, even if this is before your deferral period is over.
Waiver of Premium Benefit
This means you won’t have to pay your Income Protection premiums while you’re claiming on your policy.
Life Insurance Benefit
Many Income Protection policies come with a small amount of life insurance, usually equivalent to a year or two years’ worth of monthly premiums to provide support to your loved ones should you die during the term of your policy.
Back to Work Benefit
Many Income Protection policies don’t stop paying when you go back to work. If your earnings are reduced because of your illness (perhaps because you are working fewer days or reduced hours), your Income Protection will continue paying out, albeit at a reduced rate in line with your reduced earnings. This will normally end once your earnings recover to the level when you took the policy out.