Income Protection Insurance, which is commonly known as “IP Insurance” can provide financial coverage when someone is unable to work.
There are three different types of IP Insurance to provide protection in different situations – unemployment only, accident and sickness only, or accident, sickness, and unemployment, which is a much more comprehensive plan.
You can protect up to 70 percent of your gross salary that pays out in a tax-free, monthly payment.
Why You Should Consider Income Protection Insurance
The monthly payment received as part of the Income Protection Insurance can help to ease the burden of financial responsibilities when the covered is unable to work and earn an income. This product is useful for those wishing to cover their salary, which can help them to avoid falling behind on montly bills and other financial responsibilities.
Some of the situations to consider using income protection insurance include:
- Will you struggle to make ends meet if you go out injured with no salary
- Are you self-employed
- Are you the sole provider in your home
Length of the Benefit Term for Income Protection Insurance
In general, the longer the term for Income Protection, known as the “benefit term,” the higher the monthly premiums for this type of insurance coverage. Many companies offer two benefit terms for IP Insurance – short-term income protection policies designed to help provide payouts for a short period of time, usually between six and twelve months and long term income protection policies, which will provide payouts for a longer period of time. Long term policies are meant for those who are ill and will not be able to work again.
Amount of Coverage Needed for an Income Protection Insurance Policy
The amount of coverage to consider when purchasing an Income Protection Policy will depend on the current situation and financial need. It is important, however, for individuals to not take out too much or too little coverage based on their needs. In general, the maximum amount of coverage someone can secure is up to 70 percent of gross monthly earnings, which is the amount before taxes are taken out, in which the benefit payments are tax free.
There is also the option of choosing less coverage than the 70 percent maximum, which often means that monthly premium payments for the insurance coverage will be lower. Additionally, some Income Protection Insurance Providers will also provide policies to help protect the value of employment benefits, such as a private health insurance policy or a company vehicle – these are known as benefits in kind or P11D benefits.
When making a decision about the amount of Income Protection Insurance coverage that it needed, it is important to also factor in any state benefits and the value of other income protection products, such as a life insurance policy or critical illness coverage policy. While some may have these types of products available to them through their current employer, it is important for them to keep in mind that these protections will go away when they leave the company.
There is also the option of doing what is known as “self-insuring” instead of paying the cost of monthly premiums – self-insuring is where individuals save the money they would have otherwise spent on insurance payments to build their personal savings. However, even with personal savings, it is important to remember that not having an income can make a significant impact on that fund and deplete it very quickly.
Different Types of Income Protection Insurance Cover
When consumers are ready to purchase an Income Protection Insurance policy, there are a number of different policy types to choose from based on needs and preferences for coverage.
Some of the available options for IP Insurance include:
Age-Related Income Insurance Policies: For this type of policy, the premium payment will increase every year in line with the age. The increase amount will generally be outlined in the policy. Once the policy has been established, it will not be affected by occupational changes or changes in lifestyle. This type of policy tends to be popular for those seen as a higher risk to insurance providers, such as those with hazardous occupations or those who smoke tobacco.
Guaranteed Policies: This type of policy has a guaranteed premium payment, which means the payment stays the same throughout the life of the policy regardless of length. The only time the payment will increase is coverage is increased. While this type of policy can be expensive in the beginning, it often tends to be a cheaper, more financially stable option over a longer term.
Reviewable Policies: What makes this policy unique is the policyholder and the insurance provider will review the Income Protection Insurance policy on a regular basis, usually annually, which could potentially result in the premium payment being increased. The draw of a reviewable policy is the premium payments are cheaper in the beginning of the policy but often become more expensive.
Specific Income Protection Insurance Products
While there are a number of different policy types, there are also a number of different income protection products that fall under the overarching term of Income Protection Insurance. Any of the products outlined will be beneficial to those who find themselves without regular income, whether it is due to unemployment, sickness, or injury.
While these products will all differ, they all work toward the same goal of helping to bridge the gap financially when someone is out of work:
Mortgage Payment Protection Insurance: This type of income protection product provides individuals with a monthly payout that is equal to the amount of their home mortgage payment. This coverage is provided for individuals when they are not working due to accident, illness or unemployment.
Payment Protection Insurance: A payment protection insurance product, or PPI, with provide coverage for minimum monthly credit card payments and/or monthly loan repayment amounts when the policyholder is unable to pay them on their own due to not being able to work.
Unemployment Protection Insurance: This product is also known as redundancy insurance and provides coverage for those finding themselves in a situation of unemployment. This product will pay out a predetermined monthly amount for a specific amount of time.
Loan Protection Insurance: Loan protection insurance products pay out a monthly sum that can help with loan repayment obligations when the covered is not working due to unemployment, injury, or illness.
Information on Optional Cover with Income Protection Insurance
In addition to the monthly payout individuals can receive when they make an Income Protection Insurance claim, they may also be able to receive financial support in the following areas:
Rehabilitation: Some insurance providers may offer clients additional financial support to help get them back to work faster including the cost of retraining or help finding a new job. It is also possible for the provider to pay partial benefits should the individual only be able to secure part-time work.
Waiver of Premiums: Generally, individuals will have to continue to pay their monthly premiums even if they are not working in order to keep their policy valid. In order to avoid this problem, individuals have the option to take out a waiver of premium product that would provide coverage for the insurance policy payments during the period while out of work.
Terminal Illness Cover: Those diagnosed with a terminal illness not likely to survive the coming year can sometimes arrange a lump sum payout of their benefits with their insurance agency. This is generally equivalent to what would have been paid over a period of time. Check with the insurance provider to see if this is part of a standard policy.
Death: Some Income Protection Insurance providers will also offer a death benefit product. If this type of coverage is an option, the insurance provider will pay out a lump sum based on the monthly benefit amount.
Deferred Periods with Income Protection Insurance
Many, if not all, Income Protection Insurance providers will only pay out their client’s benefits after a set period of time, known as a deferred period. This waiting period is usually anywhere between four weeks and 52 weeks. After this deferred period, the insurance provider will continue to pay out monthly until the covered is able to return to work or until the IP policy expires, usually when the policyholder reaches retirement or at the end of a fixed period of time.
The individual will choose the length of the deferred period when they purchase the Income Protection Policy. Generally, the longer the deferred period the lower the premium payments. It is important to consider how long of a deferred period from a financial standpoint when someone is unable to work. It is also important to know whether or not the employer will offer any financial support, such as paying the salary for a period of time immediately after the illness or injury.
Why Occupation Class is Important
When applying for an Income Protection Insurance policy, you will need to list occupation class. An occupation class plays an important part in deciding the premium payments and when you will be eligible to receive their benefits. There are generally three classes of occupation from which to choose.
They include:
Any Occupation: When making a claim, the insurance agent will determine whether or not the applicant can work in any occupation. If he or she is found to be unable to work in any field or capacity, he or she will then receive the benefits. Any occupation coverage is likely less expensive.
Suited Occupation: When making a claim, the insurance agent will determine whether or not the applicant can work in an occupation that is suited to their skills and experience, even if it isn’t the exact job they did before they were unable to work. If the applicant is found to be unable to work another job that is similar to their original employment, they will receive their benefits.
Own Occupation: When making a claim, the insurance agent will determine whether or not the applicant can work in the specific job in which they held before making the claim. If he or she is found to be unable to work in that specific job, he or she will receive their benefits. Own occupation coverage is generally the most expensive.
Insurance Protection Payment Deductions
Should someone become ill or be injured, their Income Protection Insurance will pay out up to the limits of the benefits, but only when the deferred period has ended and the following deductions have been made:
- Income from self-employment
- Wages and sick pay
- Payments from another insurance policy
- Pension payments that begin when the individual stops working
- Any other income, including stock shares and dividends
While the payout will be reduced after these deductions, the following will not generally affect the payout amount.
It is still important to check the terms and conditions of the specific policy since some insurance providers may take these as deductions:
- Income support and other means-tested benefits
- Social Security
- Income from investments
It is also important to note the receipt of an Income Protection Insurance policy may have an impact on the ability to receive benefits from the state – payments from these types of policies are often assessed by the state government when evaluating means-tested benefits.
How Premiums for Income Protection Insurance Policies are Calculated
Each insurance provider will have their own set of criteria that will be used to determine the premiums as well as how much risk they pose to making a claim – if the applicant is determined to pose a high risk of making a claim, premium payments will likely be higher. While each insurance provider will use the same determining factors, how they weigh these factors will differ and no two policies and the amount of premium payments are identical.
Insurance agents will take a number of factors into consideration when making this decision, including the percentage of salary to insure, the benefit period, and the deferred period requested.
Additionally, the provider will look at occupation class and how likely the insured is to make a claim. Some other determining factors that will be evaluated can include:
Medical History: Past illnesses and medical history will be evaluated when making a decision about the amount paid in monthly premiums. Certain conditions considered life threatening, such as Type 1 Diabetes, will increase the price of the IP Insurance policy.
Family Health History: Even if the applicant doesn’t have any illness in his or her personal medical history, the insurance provider will also look at the family’s medical history, considering critical illness history, such as cancer.
Age: Insurance agents will also take the applicant’s age into consideration – generally, the older an individual is, the more likely they are to make a claim, which will raise the premium payment.
Occupation: If the occupation is considered high risk, the applicant is usually at a higher risk of making a claim. Fire fighters, police officers, and military personnel are often considered to have high risk occupations, which will be reflected in the higher amount of premium payment.
Alcohol Consumption: Since drinking regularly and drinking more than the recommended amount can lead to health problems, including hepatitis and liver disease, this behavior can often lead to the insurance agent setting a higher premium payment for the applicant.
Tobacco Use and Smoking: Since there is a proven link between smoking and throat and lung cancer, using tobacco products puts individuals at a higher risk for making a claim. Tobacco use includes cigars, cigarettes, pipes, electronic cigarettes, and nicotine patches. Even those who only occasional smoke can see their tobacco use responsible for higher premiums.
Gender: In years past, gender also played a role in determining premium amounts, especially for women due to their propensity for pregnancy related illnesses and breast cancer. But, in 2012, the European Court of Justice ruled that including gender as a determining factor for premiums was illegal.
Reviewing the Insurance Amount for Income Protection Insurance
Those already insured should periodically review their benefit amount when they hold an Income Protection Insurance policy. Some of the triggers for this kind of review include an increase in salary or a change in occupation type.
Some insurance providers will allow clients to review their policy amount on an annual basis while other providers will require them to provide proof of salary increase or change in occupation before the policy can be reviewed. In some cases, it is possible to index link the policy, so the amount of cover increased in line with current inflation.
Income Protection Insurance can provide peace of mind knowing you will still receive financial support even if you are unable to work due to unemployment, illness, or injury. Should you need more information on Income Protection Insurance or want to find out about available policies, the professionals at Claybrooke can help find the perfect policy for you.