During a recent financial assessment with a client, which I do with all clients, I asked him if he had any income protection. He replied that he did. I was surprised and impressed. This is not something young people often think about, but this man in his twenties had it all sorted. He quickly responded with, “I think that I have that with mortgage protection.” Ah ha. This wasn’t the first time that I heard it, and I’m sure this won’t be my last. Perhaps we, as Financial Advisors, and the person who sold him the original policy are to blame. So I set out to educate the general public, or anyone who is reading this, about the differences between Income Protection and serious illness.
In general, income protection can be used as a standalone policy. Although it is not often linked to your mortgage, you can use it as a payment protection insurance policy in certain cases. It can either be used as a standalone policy or integrated into a mortgage protection or life policy. This is often where confusion can arise. The client had previously taken out a mortgage insurance policy through the bank that he obtained his mortgage. At the time, he was offered severe illness coverage. This policy is cheaper for younger people so he chose to take it.
If you are diagnosed with a serious illness, your policy will pay a lump sum. Every company has its own list. They may differ slightly, so make sure you’re getting the best coverage. While they all would cover cancer, stroke and heart attack, most companies list more than 40 conditions. The insurance company would pay a lump sum in the event of a claim. This could be used to pay off your mortgage or to fund any treatment that you require. This cover is great if you have a short-term illness that you can return to work quickly. However, if your condition is severe enough to require immediate cash to pay off a mortgage or other loans, or if you are unable to work for a while the lump sum will not last.
Income protection, on the other side, provides regular income for you in the event that you are out of work for an extended period. It covers any injury or illness that renders you incapable of working. Yes, any illness or injury, even those that are not covered by the serious illness coverage. You will be paid until your retirement or until you return work. Your employer may offer sick pay, but there is no legal obligation. Income Protection insurance is something you should seriously consider. When you are out of work for more time than the stated period, which can be between 8 and 13 weeks or 26 weeks or 52 weeks, your coverage kicks in. For those who are paid for six to twelve months by their employer, the waiting periods can be longer. This could be combined with income protection so it would then kick in, ensuring that there is no income gap. Maximum amount you can claim is 75% your regular salary. This can quickly add up and could easily account for 2 to 3,000,000 if you are never able work again.
