An income protection policy could keep you in your property if you can't work or have an accident
Income protection is one of the most important insurance products you can have to protect yourself and your family if you are sick and/or injured and unable to work.
My article highlights the facts and busts the myths of income protection. It will hopefully help anyone debating whether to have the product see the true value in protecting their income.
Income Protection- The facts
Income protection policies pay a tax-free monthly income if you are signed off by your doctor because you can't work due to illness or injury.
I like to refer this to my clients as ‘personal sick pay cover’, as this essentially is what it is covering. Income protection is designed to pay you enough money to cover your mortgage/rent, bills and lifestyle costs when you are sick and unable to work.
What if I receive sick pay from my employer?
Income protection takes into consideration the sick pay received from your employer. We call this ‘deferring’ the product. This means the period of time between a claim and when you receive your monthly benefit amount. The longer your deferment period is, the cheaper your premiums will typically be.
How long does it pay for?
Income protection will pay you for your chosen period of time, and this is typically for one, two or five years, or until you retire.
The benefit of having payment cover until retirement is that you will receive your money until pension age when permanently unable to work. However, for this reason, premiums are more expensive.
A cheaper alternative is to have a one, two or five-year claim period, as, after this point, your money will stop. However, when permanently unable to work, you may find yourself in financial difficulty after this point.
How much of my income is covered?
Insurers will generally cover you for up to 60% of your income so if you earn £1,000 per month, the provider will cover £600 per month, tax-free, during a claim.
Clients have the flexibility to choose the amount they require as long as it does not exceed the limit they are subject to. To lower their monthly premium, they can reduce the monthly payout.
Income protection- the myths busted
Is this the same as PPI?
Income protection is often mistakenly confused with PPI (payment protection insurance) or MPPI (mortgage payment protection insurance). This is unfortunate because PPI has not had positive press coverage and they are two completely different things!
PPI will only cover the loan you have applied for, and not protect your other bills and your lifestyle when unable to work. PPI is also paid directly to the loan provider and not the policyholder.
Will the policy payout when I need it to?
We see a higher claims rate than ever before in the insurance industry. In 2018 the insurer Vitality paid on 97.8% of income protection claims.
It is worth noting that the main reason for claims not being honoured is non-disclosure. I work hard to encourage my clients to be as honest as possible when completing an application!
It won’t happen to me!
With income protection, it is important to highlight this is one of the most likely products you will have to claim on!
Let’s take a 39-year-old female who does not smoke. According to Royal London’s ‘risk reality report’, she has a 54% chance of being off work for two months or more before retirement. If her employer does not provide any sick pay, she, unfortunately, will have to rely on the £94.25 per week statutory sick pay if she is eligible for it.
Summary
I am a strong believer in income protection and that it should always be considered when you have any monthly commitment, especially a mortgage.
The consequences of not having this product can go as far as home repossession, and I cannot stress enough the financial safety net this product provides.
Contact Danny Davis on 020 7016 0799 or email to arrange an income protection policy
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