In an uncertain world where there is no such thing as a job for life, it makes sense to protect your income with the right insurance.
Income Protection Insurance (IPI) is a type of insurance policy designed to provide you with an income of up to 70% of your regular income in the event you become incapacitated and are unable to work due to an accident or serious illness. Some policies also cover against unemployment. The government provides State Benefits for this scenario (Incapacity Benefit and Statutory Sick Pay), but these are considered a safety net, offering a small source of income but nowhere near your regular salary. Income Protection Insurance is designed to make up the shortfall and provide the policyholder with the reassurance that their major household expenditures like mortgage payments, utilities, and council tax will be covered during these difficult times.
Mortgage Protection Insurance (MPI) is an insurance policy designed to cover the cost of your mortgage if you are unable to work due to ill health or being made redundant. For most families, mortgage payments are their single biggest monthly expenditure and payments must be made even when you are unable to work. General income protection insurance payments can be used to cover your mortgage or you can choose to take our a specific policy to cover your mortgage. These policies will usually pay you a set amount for a period of time (up to 2 years). Mortgage insurance can cover you for unemployment only, ill-health only or both scenarios.
Is It Worth Having?
For many people, income protection insurance is a valuable product in case the worst should happen. If you weren't able to work because you were made unemployed, or because you fell ill or had an accident, you would still need to cover all your bills, including the mortgage or rent. Most people don't have a large emergency fund of a year's salary, so the insurance product is an easier way of providing the same safety cushion.
IPI is available to just about anyone, and the benefits apply to everyone. Some groups of people are considered more likely to invest in an IPI Policy. These people include the self-employed, those with children and other dependents and those with little or no savings which couldn't make ends meet if they were not receiving regular salary payments.
It makes sense to shop around for the right premium for your needs. Don't automatically go for the cheapest: compare like for like on the policy terms so that you can get a fair and accurate comparison. Read the small print carefully, and remember that you will save money by paying for the year upfront rather than by month.
As with all insurance policies, the price (monthly premiums) of an Income Protection Policy will depend on factors such as age, gender, medical history and occupation. Another variable will be what's known as the "deferred period." Your IPI policy will only start to pay out after this period has expired meaning the shorter the deferred period, the more expensive the policy tends to be. The final choice you will face will be a "guaranteed" or "reviewable" policy. The former charges a fixed monthly amount for the length of the agreement while the latter increases the monthly premiums over time.
You can also lower your premiums by reducing your risk factors. You will need to take a medical questionnaire when you apply for the insurance, and if you smoke, are overweight, don't exercise, have family history of certain conditions and drink more than the recommended amount, you will become a riskier prospect for a payout and have to pay more. Similarly, you will find that certain professions are riskier and will be more expensive to insure, and others will simply be excluded entirely for income protection purposes.
How Long Does Your Cover Last?
Short-Term Income Protection Policies are designed to provide temporary cover for 6-12 months after the holder stops working. Longer Term or Permanent Policies are available in the event you are never able to work again but as you would expect these policies are far more expensive. Even these policies usually expire when you reach retirement. Most policies allow you to cancel at any time (with 30 days notice) making them effectively "Pay As You Go" solutions. As long as you continue to make the monthly premiums, the protection will remain in force.
How Much Will You Receive?
Income Protection Insurance Policies are generally very flexible, and it is up to you to calculate how much cover you will need. It is advisable to create a monthly budget that includes all of your regular household bills and personal expenditure. Take into account any State Benefits you will be entitled to and work out how much you will need to survive without dipping into your savings. Similarly, check for other insurance products that you may have in place. Many mortgage lenders require some form of IPI Policy to be put in place so your monthly mortgage payments may already be covered. Does your employer provide any insurance cover as part of your contract?
It should be remembered that IPI payments can be reduced if the policyholder has other sources of income e.g. income from self-employment, share dividends, other insurance products or pension payments. Check the details of the policy before you sign up as each one tends to differ in the fine print. Policies that cover 50% of your regular income are cheaper and offer a wider choice than those covering 70% so try to avoid paying more than you need to by over-insuring yourself.
Common Restrictions and Exclusions
IPI policies may place restrictions on the place of residence or the occupation of the policyholder, and the maximum period they may leave their place of residence without affecting the protection offered by the policy. Disabilities and sickness arising from alcohol, drug abuse or a criminal act are typically excluded. Illnesses arising from pregnancy or self-inflicted injuries are likewise excluded. It is important to be very honest with your insurance provider when applying for cover. Pre-existing medical conditions that you are aware are excluded and failure to disclose these can result in your policy being considered null and void.
Types Of Protection Insurance
Other than general Income Protection Insurance, the following types of policy are common;
- Payment Protection Insurance, or PPI, provides cover for loan repayments and/or minimum monthly credit card payments in the event of an accident, serious illness or unemployment. PPI has developed a terrible reputation over the past few years due to mis-selling by financial institutions. The benefits, however, are sound.
- Mortgage Payment Protection Insurance covers the policy holders monthly mortgage payments during the period that they're unable to work.
- Loan Protection Insurance pays your monthly loan repayments if you're not able to do so yourself because of incapacity or unemployment.
- Unemployment Protection Insurance, also known as redundancy insurance pays the policy holder a monthly sum for a pre-determined period in the event of them losing their job.