Income Protection Insurance – What You Need to Know:
Unsurprisingly, at the moment, income protection insurance is a key concern for many people. Insurers have reported record figures as enquiries rose by more than 1,000% in March alone. The outbreak of the Covid-19 pandemic sent shock waves across the globe. So, it’s no surprise that the number of people fearing illness skyrocketed.
In such situations, income protection can give great peace of mind, as an insurance policy that pays out if you’re unable to work because of injury or illness.
Why is income protection insurance important?
Traditionally, income protection is one of the least popular products people take out. The irony of this is that it’s generally one of the ones most needed. According to a recent survey by Which? Some 41% of people secured life insurance, with a further 16% making sure their private health insurance was in place. Compared to only 9% who sought income protection insurance, the figures speak for themselves. So why is income protection so important?
Well, to start with, suddenly finding yourself unable to work can have far and severe ramifications for you and anyone dependent on your income. Having income protection insurance in place is a safeguard to provide the time to recover without impacting your day-to-day cost of living.
You may think ‘it will never happen’ to you, but the recent pandemic has been a very real wake up call to the kind of unexpected events that can severely jeopardise life.
People often don’t realise though that very few employers will cover your salary for more than a short period of time, should the unthinkable happen. And you probably don’t need us to tell you the toll stress can take in a situation where physical recovery is critical.
How much does it cost?
How much income protection costs vary depending on factors such as your health, whether you smoke, and how much cover you need. Insurers will also take into consideration the level of risk associated with your job. So, if you work with heavy machinery, it is likely that the cost may be more than if you have a desk job.
What changes has Covid-19 meant to income protection?
The outbreak of Covid-19 has meant that some insurance providers have started pulling out of the income protection market altogether. Meanwhile, others have begun adding coronavirus exemptions. But some have shown admirable flexibility by offering payment holidays for vulnerable cases, or for policies to be put on hold. Policies are still available to those on furlough, but its important to understand that the policies wont pay out if you are made redundant.
Policies usually pay out between 50%-70% of your earnings, tax-free – be warned, sometimes this is capped! Generally, it will pay for as long as the policy lasts or until you can resume work, whichever comes quickest. Most policies have a waiting period, meaning they won’t pay out until it has passed. Waiting periods vary in length, but they often start at around 13 weeks.
So, if you’re thinking of buying income protection insurance to cover the Coronavirus outbreak, your shrewdness may well be foiled by a lengthy waiting period. Also, you should bear in mind that it’s unlikely any policy will pay out if you’re only ill for a short time or are just self-isolating. Most policies are designed for long-term situations, and so by the time your waiting period is up, the chances are your illness will have passed.
What other considerations are there?
Index-linking your protection might be worth considering. This means that your level of protection will rise with a measure of inflation (such as the consumer price index (RPI)). The point of this is to negate the situation where you make a claim only to find that your protection level hasn’t kept in sync with any rises in your salary.
You might also want to consider ‘stepped benefit.’ This enables you to choose between two different levels of payment depending on the sickness benefits offered by your employer. The first option is a lower payment while your employer is still paying you a higher percentage of your salary. The second is to make a higher payment when your employer reduces their contribution.
Income Protection planning specifically for the sake of Covid-19 needs careful thought. You will need to check out all of the limitations currently being imposed to make sure you are getting what you hope for. That being said, there are many reasons why getting an appropriate level of income protection in place is important. As such, it is always wise to shop around and make sure you fully understand your policy. And, if you’re in any doubt, remember to seek professional help!
If we can be of any help, please do call us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch.
Written by Ben Griffiths
Ben is a financial planner from our Whiteley office. While he specialises in pension planning, Ben is also able to generalise into all other areas of financial planning.