What is Income Protection?
Income protection is an insurance policy that pays you money each month in replacement of your normal income, if you cannot work due to sickness, accidents or injuries.
Each month the insurance company will pay you a tax free monthly income that you would use to pay your mortgage, bills, childcare costs…. in the same way you would if you were working.
You could really call it salary insurance.
“Income protection is a must have product for most working adults, but few of us currently have.”
Consumer group, Which?
Do you need income insurance?
Whilst you might get some help from your employer, it’s unlikely they’ll pay you forever. Government Employment and Support Allowance (ESA) is currently £99.15 per week. Would this pay your bills and lifestyle costs?
You are 3 times more likely to suffer an illness than you are to die during your working life. If you want peace of mind that you can pay your bills if you are too ill to work, then yes, income protection would benefit you.
How does it work?
Anthony Smith is 30 years old and earns £35,000 per year. He receives 3 months full pay from his employer in the event of sickness. After this he drops to statutory sick pay. Anthony hopes to retire at the age of 60.
Most insurers will allow Anthony to insure up to 60-70% of his gross income. In this example 60% is enough to cover is bills.
£35,000 x 60% = £21,000. This is paid monthly, tax free, so Anthony receives £1,750 every month.
Because Anthony has 3 months sick pay, an insurer won’t start to pay the money until this ends. This is because you are not allowed to earn more than your usual monthly wage.
So, Anthony’s cover would have a ‘deferment period’ of 3 months, to tie in with his work benefits.
The £1,750 would be paid every month until Anthony reaches his 60th birthday.
Short Term Income Protection
If you can’t afford a policy that can pay you the money until you retire, there is the option to have your claim paid for a shorter length of time. Typically this is 2 years per claim.