Being forced to stop working due to illness or injury is a financial crisis that, thankfully, few of us have to face. Many are faced with the dilemma of ‘how will I protect my income?’ or, more seriously ‘how can I protect my family’s income?”
However, every day, ill health or workplace accidents leave hard working people financially crippled and unable to pay the bills or meet basic living costs.
In addition to this, the safety net for people with disability or who are too unwell to work has been cut back substantially in the past five years and looks set to continue to dwindle long into the future.
Therefore, many workers are choosing to insure themselves against the possibility of being invalided out of their careers early.
This short blog explains how income protection insurance works, so you can decide whether it is appropriate for your circumstances.
How IP Works
Most insurance protection policies (IP) pay out until you return to work, you hit your retirement age, or if you die before retirement.
The policy typically pays out half to three quarters of the income a person was earning before they were forced to stop work and will normally start to pay out a year after the claim was made.
IP should not be confused with the now notorious payment protection insurance (PPI) which was designed simply to pay off specific debts such as credit cards if the policy holder lost their job.
Types of IP
Long term cover, as mentioned above, will offer you protection until you return to work, retire or pass away. Short term cover, which is normally cheaper, lasts for a fixed period, normally five years.
You might find that an Accident, Sickness and Unemployment policy is suitable, as it also covers job losses which do not relate to ill health, but are beyond your ability to control (ie redundancy).
As with every market for financial services, there are cheaper and more expensive products in the income protection market.
Guaranteed IP policies are at the more expensive end normally, because the monthly charge is fixed, not variable.
Reviewable IP policies are re-assessed every five years and monthly charges can go up to reflect changes in inflation over time. If you are insuring a large income and don’t appreciate sudden price rises, you might consider a guaranteed policy.
Age related IP is another way that insurers can gradually put prices up.
The risk to the insurer of the policy holder having to make a claim increases over time as they grow older, which means that gradually, the monthly charge goes up too.
Unlike with a reviewable policy, however, none of this should come as a surprise to the policy holder, who agrees the rate of increase at the start of the agreement.
Depending on your job role, you will be quoted different prices for IP policies, which reflect the risk to the insurer.
Accountants will generally fare better than construction workers or police officers, for example.
If you would like some impartial guidance on finding the right IP policy for you, click here for details.
To work out how much you may need try our calculator below
Income Protection Calculator
If you are unsure how much cover you need then please use our cover calculator as a guide. Add in a monthly amount for each of your outgoings you would like to protect then click the Calculate button. Please enter 0 if you do not require cover for a particular section.