Income protection insurance can provide a much-needed lifeline when life takes an unexpected turn.
Think Plutus are expert advisers on this type of insurance and we have created this guide to help you understand whether it would be a good option for your circumstances. Read on to find out how it could help you and where to get the best deals. If you have any questions, please don’t hesitate to contact us and we’ll be happy to help.
What is income protection insurance?
This type of insurance used to be known as Permanent Health Insurance (PHI). It is designed to provide you with a monthly income in the event that you are rendered unable to work by injury or illness. There are two forms of income protection:
- Income protection insurance: This pays a monthly sum right up to the point that you either return to work or reach retirement age.
- Short-term income protection insurance: This also offers a monthly sum but only for a limited period, typically 2-5 years when you make a claim.
The benefit of the second option is that it is significantly cheaper than the first. You will need to weigh up this affordability against the benefits of receiving a monthly sum indefinitely.
How does income protection insurance work?
As previously noted, income protection insurance used to be known as Permanent Health Insurance. It could be argued that this was a more accurate name than what we call it now.
This is because income protection insurance is intended to offer a long-term solution in cases where illness or injury renders you unable to work. As long as the illness of disability involved is covered by your policy, you will receive a monthly income until you are able to return to work or retire. There are even policies that can be taken out to cover a mortgage, meaning that if your mortgage term extends into retirement, you would still receive the payout you need.
You should also know that you can make as many claims as you need to during the term of the policy – it doesn’t matter whether you need to claim for a new illness/injury or a recurrence of a previous one.
Another important factor is that there is usually a delay with income protection insurance known as a ‘deferment period’ before payments begin after a claim. This is in the expectation that you will be offered sick pay by your employer for a certain period of time. There are policies available with a shorter delay at the start, but these come at a higher premium throughout the term of the policy.
Why is income protection insurance important?
Data from the Association of British Insurers (ABI) shows that more than a million British people are rendered unable to work by injury or serious illness every year. Sick pay and government benefits are there to provide some assistance, but many people have financial commitments that make up the majority of their monthly salary. This means very few of us could manage without their full regular income for very long.
Income protection insurance can provide real peace of mind, particularly for the main breadwinner of the household. This is why most financial experts recommend having it in place.
That said, it is just one of the insurance types that are available to offer you protection if serious illness strikes. This is why it can be helpful to seek expert advice to understand which option, or combination of options, will be right for your personal circumstances.
Income protection vs life insurance
This comparison may seem a little extreme, but the reality is that most life insurance policies do not simply pay out upon your death.
Most life insurance policies will actually pay out if you are diagnosed with a condition that is expected to cause your death within 12 months. Of course, this is the worst possible turn of events and not something we like to think about. But it is a fact that life insurance can provide a form of income protection if a very serious illness or injury occurs.
Income protection vs critical illness cover
Critical illness insurance is a product that offers a single lump sum in the event that one of a range of specific, critical illnesses occurs. These illnesses are not necessarily terminal, and can include anything from amputation to heart attacks, or from HIV to early-onset Alzheimer’s.
Many people choose critical illness cover as a large lump sum in the event of a serious diagnosis can be a massive lifeline. It could help cover living expenses or even pay off a mortgage if the level of cover is sufficient. However, there are many serious illnesses that can permanently incapacitate you, so it’s worth acknowledging that if you are stricken with a critical illness at a young age, the lump sum payout from critical illness insurance may not keep you going until retirement.
Income protection, on the other hand, is designed to do precisely that.
Is it worth taking out income protection insurance?
In life, motor insurance is a legal requirement if you own a vehicle. Other insurance policies, like income protection, are optional. Whether or not it is worth the investment really depends on how you feel about risk. If you’re happy to gamble on a lifetime of good health without suffering any serious injuries, you may not feel the need for income protection.
If, however, it would give you peace of mind to know that you have a guaranteed income even if you are no longer well enough to work, it is worth considering. The statistics suggest that it would be prudent to take out income protection insurance.
That average of a million people in Britain – every year – being unable to work due to injury or illness is a reality check. Figures from Cancer Research UK also show that no fewer than half of us will be diagnosed with cancer at some point in our lives.
So whilst many are willing to take their health for granted, there are plenty of reasons to think that having insurance in place to protect your income would be a wise decision.
The pros and cons of income protection cover
This article primarily focuses on income protection insurance, but we compared it with life insurance and critical illness cover for good reason. These are three different types of policy that provide much-needed protection in their own ways. They can be used in a complementary way to provide the type and level of cover that works for your circumstances.
For example, many people with no dependent believe that critical illness cover would be better for them than life insurance, since it will pay a lump sum even if the diagnosed illness is not considered to be terminal. However, the premiums for life insurance are usually far lower. Meanwhile, income protection insurance provides a permanent income that would probably outlast any single lump sum that would come from a critical illness policy.
There is much to consider before taking out any of these insurance types. Think Plutus offers detailed information on each of them on our website so please read our detailed guides to help with your decision-making.
However, we urge you to contact us for detailed, tailored advice that is specific to your individual circumstances before making your decision. Our expertise will help you understand the advantages and disadvantages of the different options, as well as the complementary nature that they can have with one another.
For income protection advice you can take to the bank, Think Plutus.