Income Protection Insurance

Income protection insurance (sometimes known as permanent health insurance or PHI) can pay you an income after a statutory sick period expires.

What it does
Income protection insurance is designed to replace part of your income if you are unable to work for a long period of time due to an illness or disability. It will continue to pay out until you can return to some form of paid work or until you retire, whichever is sooner.

With income protection policies there is always a waiting period before they will pay out. The longer you agree that you will wait, the lower your premiums will be, so it is important that you find out what income you can get from your employer or any other insurance (such as mortgage payment protection insurance) in the event of illness or disability.

Income protection cover may not be available to you if you have existing health problems or you do a job that is considered dangerous.

Key things to consider
If you are employed and you fall ill, your employer might pay you your full pay for a few weeks or months. You may receive some statutory sick pay for a period of time however, this will likely be a lot less than your full earnings. After that period, you would then probably have to rely on benefits provided by the state.

Some employers arrange group income protection insurance for their employees as a benefit of their employment. This can pay out an income after any statutory sick period. So do check what you are entitled to.

You would probably see a substantial drop in your income if you were out of work for more than a few months due to an illness or disability. This type of insurance aims to restore you to the financial position that you were in before you suffered a loss.

It will not allow you to make a profit out of your misfortune. So the maximum amount of income you can replace through insurance will generally be the after-tax earnings you have lost, less an adjustment for any state benefits you can claim. This often translates into a maximum of, say 50% to 65% of your before-tax earnings.

You pay a monthly premium for income protection insurance throughout the term of the policy. The cost (or premium) mainly depends on:
  • Your age at the time you start the policy. Older people are more likely to suffer an illness, therefore they have to pay more.
  • Your gender can have an affect on the premium you will pay.
  • Your health at the time you start the policy. If you have existing health problems you may be refused cover or have to pay higher premiums to obtain it.
  • Your job - for example, an office worker may be deemed to have a very safe job but a deep sea diver faces many risks and would therefore have to pay higher premiums;
  • Hobbies and lifestyle - for example, smoking raises the risk that you may become ill, so you will pay higher premiums for cover.
  • Waiting period - once you claim there will be a period before payments start. You can often choose how long this is, for example, from 4 weeks up to 104 weeks. The longer the waiting period the less you will pay for the policy.

Things to check
Check whether you already have protection in place in the event that you are incapacitated, and for how long that protection would last. For example, your employer may have an income protection scheme in place you can benefit from or you may have payment protection insurance that covers your mortgage.

Check whether the policy reduces what it pays out if you receive state benefits or claim money under another insurance policy.

Some policies only pay out if you cannot do any work however, you would have to be seriously incapacitated to not be able to work at all. Other policies cover being unable to do any work for which you are suited. The best policies pay out simply if you cannot do your normal job, but premiums for these tend to be more expensive.

Most policies pay out until you reach the age of 65 or when you have chosen the cover to end.

Check how different occupations are treated. Different insurance companies sometimes put the same job in different risk categories.

Will the cover provided increase in line with inflation?

Finally, critical illness insurance - which pays out if you are diagnosed with a life-threatening condition or illness listed in the policy can sometimes be a cheaper and simpler alternative to income protection insurance. Be aware that there are lots of common situations when critical illness insurance would not pay out, for example if you had back problems or a stress-related illness.


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