Matt Cotter explains income protection.
How does income protection work?
Income protection is a policy that covers a person’s wage if they’re unable to work. It will usually start to pay out after a set period of time, known as the deferred period, which you can choose when setting up the policy. It could be anywhere from four to 26 weeks.
If you receive sick pay from your employer then the cover can be set to kick in once your sick pay entitlement has finished. But we’re increasingly finding that most people actually don’t get any sick pay at all from their employer – they have to rely on Statutory Sick Pay (SSP). That can create a problem in paying bills if they’re unable to work.
Income protection replaces an income on a monthly basis if you’re unable to work due to sickness or injury. It means you can continue paying your bills and not rush back to work.
Is income protection worth it?
It’s something that everybody should certainly consider. There’s life insurance and critical illness cover for serious illness and death. But we’re much more likely to need some time off work during our lives for less critical conditions.
For most people only receiving Statutory Sick Pay at £99 a week, that won’t be enough to cover even their food bills. So long term sickness can be a huge problem.
Most people in the country are probably unaware of how income protection works, how much it costs and what it can do for you. It’s particularly useful for people who are self-employed, for example, so it is well worth it in most cases.
You’ll pay a small monthly fee depending on your age and health status but generally it is much less than the amount you receive every month if you’re unable to work. That can mean paying the mortgages, keeping a roof over your head, food in the fridge and so on. You could argue that it’s more important than ever right now with the cost of living going up.
Who needs income protection insurance?
Most people will qualify for cover, and some need it more than others. A few can continue earning even if they’re unable to physically work – such as landlords who make an income from their rental properties.
But generally most of us have a standard job, where if we cannot work we won’t be earning. It’s particularly important for people with no sick pay from their employers. That seems to be most of the country now, unless you’re a public sector employee.
There has also been a misconception in the past that self-employed people can’t get income protection – but they most certainly can.
How much is income protection insurance?
It will always vary person to person. There are many factors that contribute to the cost of an income protection policy:
- The age of the person being insured
- Their health and whether they’ve had time off in the past
- How much they need to receive each month
- How many months they want to receive payment for
- Whether they want the policy to stay static or increase over time with inflation.
Generally speaking, income protection is less expensive than you might think. You can pick up income protection for not a great deal each month.
Is income protection tax deductible?
An individual who takes out income protection will pay a monthly premium. If they need to claim, they’ll receive a lump sum each month which will have no tax at all.
An office worker taking the maximum amount of cover will typically receive 60% of their salary. That’s because when the income protection policy pays it is completely tax-free. So 60% is comparable to what they would usually take home on a monthly basis after income tax.
If you’re a business owner looking to take out some income protection either for employees or yourself, we need to have a separate conversation about business protection. But for most people, the amount you’re insured for is the amount you will receive into your bank account.
Our job as a mortgage broker is to source the market for the best options for you. Our experience and depth of knowledge can help you to secure that all-important mortage at the best rate we can.
What are the benefits of income protection?
The key benefit of income protection is that people can continue to pay their bills, cover their mortgage and debts etc if they’re unable to work due to sickness or injury. It pays a monthly income so that you can continue to pay for your essential costs.
What am I not covered for?
There is quite a broad definition of cover. Generally, if you’re unable to perform your occupation due to any sickness or injury then it will pay.
There are some exclusions within an income protection plan, generally based on whether you have had time off in the past – that health condition or injury may be excluded from your income protection plan.
Certain risky occupations can also mean exclusions. For example, if you work at height, you may find that there’s a height exclusion on the income protection plan. However, if you have a standard office job and you haven’t had any time off or health concerns, generally you will be covered for any sickness or any injury.
Another thing to take into account is the terms for your income protection. Most people choose ‘own occupation’ cover – which pays if you can’t perform your occupation due to sickness or injury. Sometimes people choose income protection on a different definition – perhaps the ability to perform specified work tasks or daily living activities instead of occupation.
Here, to make a claim you would need to be unable to complete general daily activities or key working tasks – not necessarily to do with your own occupation. We can explain this further if that’s of interest to you.
How much income protection do I need?
Most insurers will typically offer a maximum of 60% of one’s income, as we said earlier. But you don’t have to go for 60%. You could save a bit of money on a monthly basis by calculating how much you would need to cover your mortgage, bills and food and look to protect that amount of your income.
Generally if we’re looking at offering income protection, we would have already done all of that research prior to providing you with a quote.
How long does income protection pay?
When you’re looking at income protection, there are various options to consider. It comes down to how much you want to spend and how comprehensive you need the cover to be.
There are two different options with most insurers:
- Full income protection – if you are unable to work you claim income protection for as long as it takes until you return to work, or the policy ends. Like life insurance and critical illness insurance, you’ll set a number of years for cover – up to retirement age is quite common. With full income protection you can claim right up until retirement if you don’t return to work.
- Low-cost income protection or low payment income protection – where there is a limit on how long the insurer will pay each time you’re off work. Generally insurers offer a one year or two year payment period. So if you’re unable to work due to sickness or injury you will receive payment for a maximum of one or two years. But if you return to work and have more time off in the future, you will gain payments for up to another year or two years.
How can The Mortgage Broker help me with income protection?
The important thing is to think about the financial impact of time off work on you or your family. We will sit down with you and assess the impact of taking six months or a year out of work. If there is no sick pay in place, most people can’t get by without their income.
We explain the relevant options and get you a quote for suitable cover. If you’re happy, we will then set the policy up for you. But the main way we can help is to make sure you really understand whether you need this protection, how it will help you and what to expect.
If somebody is listening and wondering about protecting their income, the best thing to do is have a conversation with an adviser like myself to explore what it means for you. You won’t pay for my service at all, just the insurance policy. We’re happy to give advice completely free.
Your home may be repossessed if you do not keep up repayments on your mortgage.