Income Protection Insurance, commonly known as “IP Insurance,” can provide financial coverage when someone cannot work.
There are three types of IP Insurance to protect in different situations – unemployment only, accident and sickness only, or accident, sickness, and unemployment- a much more comprehensive plan.
You can protect up to 70 per cent of your gross salary, which will be paid out in a tax-free monthly payment.
Why You Should Consider Income Protection Insurance
The monthly payment received as part of the income protection insurance can help ease the burden of financial responsibilities when the covered person cannot work and earn an income.
This product is helpful for those wishing to cover their salary, which can help them avoid falling behind on monthly bills and other financial responsibilities.
Some of the situations to consider using income protection insurance include:
- Will you struggle to make ends meet if you go out injured with no salary
- Are you self-employed
- Are you the sole provider in your home
Length of the Benefit Term for Income Protection Insurance
Generally, the longer the term for Income Protection, known as the “benefit term,” the higher the monthly premiums for this type of insurance coverage.
Click To Compare QuotesMany companies offer two benefit terms for IP Insurance: short-term income protection policies, which provide payouts for a short period.
This is usually between six and twelve months, and long-term income protection policies provide longer payouts.
Long-term policies are meant for those who are ill and cannot work again.
Amount of Coverage Needed for an Income Protection Insurance Policy
The amount of coverage to consider when purchasing an Income Protection Policy will depend on the current situation and financial need.
However, it is essential for individuals not to take out too much or too little coverage based on their needs.
In general, the maximum amount of coverage someone can secure is up to 70 per cent of gross monthly earnings, which is the amount before taxes are taken out, in which the benefit payments are tax-free.
You can also choose less coverage than the 70 percent maximum, which often means lower monthly premium payments for the insurance coverage.
Some Income Protection Insurance Providers will also provide policies to help protect the value of employment benefits, such as a private health insurance policy or a company vehicle, known as benefits in kind or P11D benefits.
When deciding on the amount of Income Protection Insurance coverage needed, it is essential to factor in any state benefits and the value of other income protection products, such as life insurance or critical illness coverage policy.
While some may have these types of products available to them through their current employer, they must remember that these protections will go away when they leave the company.
There is also the option of “self-insuring” instead of paying monthly premiums. Self–insuring is when individuals save the money they would have otherwise spent on insurance payments to build their savings.
Click To Compare QuotesHowever, even with personal savings, it is essential to remember that not having an income can significantly impact and deplete that fund quickly.
Different Types of Income Protection Insurance Cover
When consumers are ready to purchase Income Protection Insurance, they can choose from several different policy types based on their needs and preferences for coverage.
Some of the available options for IP Insurance include:
Age-Related Income Insurance Policies: For this type of policy, the premium payment will increase yearly in line with the age.
The increased amount will generally be outlined in the policy. Once established, the policy will not be affected by occupational changes or changes in lifestyle.
This type of policy tends to be famous for those seen as a higher risk to insurance providers, such as those with hazardous occupations or those who smoke tobacco.
Guaranteed Policies: This type of policy has a guaranteed premium payment, which means the payment stays the same throughout the policy’s life, regardless of length.
The only time the payment will increase is if coverage is increased. While this type of policy can be expensive initially, it often tends to be a cheaper, more financially stable option over a longer term.
Reviewable Policies: This policy is unique because the policyholder and the insurance provider will review the Income Protection Insurance policy regularly, usually annually, which could potentially increase the premium payment.
The draw of a reviewable policy is that the premium costs are cheaper at the beginning of the policy but often become more expensive.
Specific Income Protection Insurance Products
While there are several different policy types, there are also several different income protection products that fall under the overarching term of Income Protection Insurance.
Click To Compare QuotesAny of the products outlined will benefit those without regular income, whether due to unemployment, sickness, or injury.
While these products will all differ, they all work toward the same goal of helping to bridge the gap financially when someone is out of work:
Mortgage Payment Protection Insurance: This type of income protection product provides individuals with a monthly payout equal to their home mortgage payment.
It is offered to individuals not working due to accident, illness, or unemployment.
Payment Protection Insurance: A payment protection insurance product, or PPI, provides coverage for minimum monthly credit card payments and monthly loan repayment amounts when the policyholder cannot make them on their own due to being unable to work.
Unemployment Protection Insurance: This product, also known as redundancy insurance, provides coverage for those experiencing unemployment. It pays out a predetermined monthly amount for a specific amount of time.
Loan Protection Insurance: Loan protection insurance products pay a monthly sum that can help with loan repayment obligations when the covered is not working due to unemployment, injury, or illness.
Information on Optional Cover with Income Protection Insurance
In addition to the monthly payout, individuals can receive it when they make an income protection insurance claim.
They may also be able to receive financial support in the following areas:
Rehabilitation: Some insurance providers may offer clients additional financial support to help them get back to work faster, including the cost of retraining or help finding a new job.
The provider may also pay partial benefits should the individual only be able to secure part-time work.
Waiver of Premiums: Generally, individuals must continue to pay their monthly premiums even if they are not working to keep their policy valid.
To avoid this problem, individuals have the option to take out a waiver of premium products that would provide coverage for the insurance policy payments during the period while out of work.
Terminal Illness Cover: Those diagnosed with a terminal illness who are unlikely to survive the coming year can sometimes arrange a lump sum payout of their benefits with their insurance agency.
This is generally equivalent to what would have been paid over time. Check with the insurance provider to see if this is part of a standard policy.
Death: Some Income Protection Insurance providers will also offer a death benefit product.
If this type of coverage is an option, the insurance provider will pay out a lump sum based on the monthly benefit amount.
Deferred Periods with Income Protection Insurance
Many, if not all, Income Protection Insurance providers will only pay out their clients’ benefits after a set period, known as a deferred period.
This waiting period is usually between four and 52 weeks. After this deferred period, the insurance provider will continue to pay out monthly until the covered can return to work or until the IP policy expires, usually when the policyholder retires or at the end of a fixed period.
When purchasing the Income Protection Policy, the individual will choose the length of the deferred period.
Generally, the longer the deferred period, the lower the premium payments. It is essential to consider how long a deferred period is from a financial standpoint when someone cannot work.
It is also important to know whether or not the employer will offer any financial support, such as paying the salary for some time immediately after the illness or injury.
Why Occupation Class is Important
When applying for an Income Protection Insurance policy, list your occupation class. An occupation class is integral in deciding the premium payments and when you will be eligible to receive their benefits.
There are generally three classes of occupation from which to choose.
They include:
Any Occupation: When making a claim, the insurance agent will determine whether or not the applicant can work in any occupation.
If he or she is found unable to work in any field or capacity, he or she will receive the benefits. Any occupation coverage is likely less expensive.
Suited Occupation: When making a claim, the insurance agent will determine whether or not the applicant can work in an occupation that is suited to their skills and experience, even if it isn’t the exact job they did before they were unable to work.
If the applicant cannot work another job similar to their original employment, they will receive their benefits.
Own Occupation: When making a claim, the insurance agent will determine whether or not the applicant can work in the specific job they held before making the claim.
If he or she is found unable to work in that particular job, he or she will receive benefits. Own occupation coverage is generally the most expensive.
Insurance Protection Payment Deductions
Should someone become ill or be injured, their Income Protection Insurance will pay out up to the limits of the benefits.
This is only when the deferred period has ended, and the following deductions have been made:
- Income from self-employment
- Wages and sick pay
- Payments from another insurance policy
- Pension payments that begin when the individual stops working
- Any other income, including stock shares and dividends
While the payout will be reduced after these deductions, the following will not generally affect the payout amount.
It is still essential to check the terms and conditions of the specific policy since some insurance providers may take these as deductions:
- Income support and other means-tested benefits
- Social Security
- Income from investments
It is also important to note that receiving an Income Protection Insurance policy may impact the ability to receive state benefits—payments from these policies are often assessed by the state government when evaluating means-tested benefits.
How Premiums for Income Protection Insurance Policies are Calculated
Each insurance provider uses its own criteria to determine premiums and the risk of making a claim. If the applicant is determined to pose a high risk of making a claim, premium payments will likely be higher.
While each insurance provider will use the same determining factors, how they weigh these factors will differ, and no two policies and the number of premium payments are identical.
When making this decision, insurance agents consider several factors, including the percentage of salary to insure, the benefit period, and the deferred period requested.
Additionally, the provider will look at occupation class and how likely the insured is to make a claim.
Some other determining factors that will be evaluated can include:
Medical History: Past illnesses and medical history will be evaluated when determining the amount paid in monthly premiums. Certain conditions considered life-threatening, such as Type 1 Diabetes, will increase the price of the IP Insurance policy.
Family Health History: Even if the applicant doesn’t have any illness in his or her personal medical history, the insurance provider will also consider the family’s medical history, including critical illness history, such as cancer.
Age: Insurance agents will also consider the applicant’s age—generally, the older an individual is, the more likely they are to make a claim, which will raise the premium payment.
Occupation: The applicant is usually more likely to make a claim if the occupation is considered high-risk.
Firefighters, police officers, and military personnel are often considered to have high-risk occupations, which will be reflected in the higher premium payment.
Alcohol Consumption: Drinking regularly and drinking more than the recommended amount can lead to health problems, including hepatitis and liver disease.
This behaviour can often lead to the insurance agent setting a higher premium payment for the applicant.
Tobacco Use and Smoking: Since there is a proven link between smoking and throat and lung cancer, using tobacco products puts individuals at a higher risk of making a claim.
Tobacco use includes cigars, cigarettes, pipes, electronic cigarettes, and nicotine patches. Even those who only occasionally smoke can see their tobacco use responsible for higher premiums.
Gender: In years past, gender also played a role in determining premium amounts, especially for women, due to their propensity for pregnancy-related illnesses and breast cancer.
But, back in 2012, the European Court of Justice ruled that including gender as a determining factor for premiums was illegal.
Reviewing the Insurance Amount for Income Protection Insurance
Those already insured should periodically review their benefit amount when they hold an Income Protection Insurance policy.
Some of the triggers for this kind of review include an increase in salary or a change in occupation type.
Some insurance providers allow clients to review their policy amount annually. In contrast, others require them to provide proof of salary increase or change in occupation before the policy can be reviewed.
In some cases, it is possible to index link the policy, so the amount of cover increases in line with current inflation.
Income Protection Insurance can provide peace of mind, knowing you will still receive financial support even if you cannot work due to unemployment, illness, or injury.
If you need more information on income protection insurance or want to find out about available policies, the professionals at Claybrooke can help you find the perfect one.