Income protection insurance replaces your monthly income in the event you become incapacitated due to illness or an accident. This type of insurance can be a great investment for employees. However, many people feel intimidated by the industry jargon as well as the large selection on the market. We have listed 5 steps that will help you buy an income protection policy.
1) Choose how long you would like your policy to be able to pay
Before you begin to search for income protection, it is important to determine how long your policy will pay out if you become disabled. This is known as the ‘benefit period’. There are two types of income protection: short-term policies and long-term policies.
You can choose the benefit term for long term income protection, but most policies will pay until retirement age. If you had income protection until age 65, and then became sick at age 45, your policy would pay until you return to work or reach retirement age at 65. Short term policies, however, will not pay for more than 12 months, even if your condition is severe.
A person who is off sick for six months or more has a 80% chance of being out of work for five years. While long-term policies offer greater protection, they may also have higher premiums.
2) Define what protection you desire.
Income protection is typically designed to protect your income and pay you a monthly tax-free benefit. You can use this money however you like. It is used by most people to pay their monthly essentials like rent, mortgage, bills, council taxes, food, and rent. Some people use it to pay for their gym memberships, school fees, and holidays. Income protection generally pays a maximum of 50% to 60% of your earnings.
You can also link income protection insurance to specific debts, such as your loan repayments or mortgage. These policies usually pay out for 12 months and are typically short-term. Mortgage Payment Protection Insurance will cover your mortgage payments, while Payment Protection Insurance will pay for your credit card or loan repayments.
Policies that have a debt-related component are more expensive than policies that replace income.
3) What are you trying to protect?
Income protection will replace a portion of your monthly income in the event that you are unable to work due to an accident or illness. This level of protection is best for those who feel secure at work and don’t worry about losing their job. It will not pay out if there are any injuries or illnesses that render you incapable of working.
Short term policies usually include coverage for redundancy, as well as sickness and accident. Although long-term policies don’t usually cover redundancy, it is possible to add this as an optional extra for a higher premium.
Including unemployment insurance in your policy will reduce monthly premiums.
How long do you think you can survive on your savings?
The length of time that your policy will pay out after you have filed a claim is called the deferred period. There are usually four, 13, 26 and 52 week deferred periods available. You can also choose the deferred period that suits your needs based on your personal circumstances. Before you buy an income protection policy, make sure you check with your employer regarding your sick pay. The law requires that employers pay statutory sick leave for up to 28 weeks. You can then work out how long you are able to survive on your savings and your partner’s income, before you begin receiving your monthly benefit.
The policy’s cost will drop if the deferred period is longer. You can reduce the cost of income protection by choosing a longer deferred term.
5) Compare to the market
After you have determined what you want covered, it’s time to look across the entire market for suitable income protection quotes. While you can contact each individual insurer, it is often easier to use a comparison site to see the entire market in just a few steps.
Income protection insurance is subject to individual circumstances. The type and price of the policy will depend on your occupation, medical history, family history, and smoking status.
