If you were unable to work due to illness or injury, income protection insurance could provide you with the financial safety net of a regular replacement income, helping you and your family to cover costs and maintain a good standard of living.
What is income protection?
Income Protection (IP) is an insurance policy that pays out if you are unable to work due to sickness or injury.
Income Protection policies pay out a set amount of income after a specified period (deferment or ‘waiting period’). The length of time the benefit is paid may be based on whether you have short-term (1 or 2 years) or long-term income protection. Long term income protection would be paid until you are fit to return to work or retire, whichever is sooner.
Usually, you can select a waiting period of between one and twelve months before your policy kicks in. Normally, the longer you wait, the cheaper the policy.
Income protection payments are usually based on a percentage of your earnings: 50% to 70% being the norm. For example, if you earn £50,000 per year and you took out a policy designed to cover 70% of your earnings, over the course of a year your policy will pay out £50,000 x 70% = £35,000. Currently this is tax free income (but remember tax rules can change)
What are the benefits of income protection?
According to Which?,
‘The one protection policy every working adult in the UK should consider, is the very one most of us don’t have – income Protection.’
Many people take out life insurance policies, particularly when taking out a mortgage or when they have children. The reality is, accidents and sickness can happen to people of all ages, fitness levels and walks of life. Would your household savings be enough to cover the bills and life’s essentials if you or your partner were unable to work?
If you were unable to work, would you be able to cover living costs?
Income protection insurance could help you to pay:
- Mortgage or rent payments
- Household bills
- Childcare costs
- School and university fees
- Car loans
- Household alterations – injury/disability
As well as the above, Income protection can help you to maintain your standard of living. For those with children; the costs of clubs, hobbies, school trips and clothes can soon mount up. If you lost your income you may struggle to maintain your normal lifestyle and treats like holidays and meals out may have to stop.
Unlike short-term protection products, long -term income protection insurance can cater for those who suffer prolonged illness or disability.
What other protection products are available?
- Critical Illness Cover – this is a long – term insurance policy that is designed to cover serious illness. If you get one of the illnesses listed within a critical illness policy you will receive a tax – free lump sum. Examples of a critical illness include; stroke, heart attack and multiple sclerosis
- Mortgage Payment Protection Insurance (MPPI) – designed to cover the cost of your mortgage payments if you are unable to work due to accident or sickness, or you become unemployed. Be aware, most MPPI stops paying out after a year and monthly payments are capped at £1,500 or £2,000 a month.
- Accident, sickness and unemployment cover (ASU) – a short term protection policy that typically provides a regular income for twelve months if you became ill, injured or were made redundant. ASU is not as comprehensive as income protection insurance and premiums can be expensive. Also, cover could be denied to those with higher risk jobs
What about Statutory Sick Pay?
If you are an employee of a company, you are usually entitled to Statutory Sick Pay (SSP). You must be absent from work for at least four days in a row, including weekends and days you do not usually work.
In order to receive SSP, your average weekly earnings must be over £116 per week. The standard rate of pay for SSP is £94.25 per week. As it is not means tested, your savings and other income will not be considered.
For many, Statutory Sick Pay would not begin to cover living costs. Although some employers will pay over the minimum amount, it may be worth considering income protection to cover any shortfall. Always check your contract of employment for details of sick – pay entitlement.
Is Income Protection right for me?
The Money Advice Service highlights the importance of income protection.
‘It doesn’t matter whether you have children or other dependents – if illness would mean you couldn’t pay the bills, you should consider income protection insurance.
When deciding if income protection is right for you, consider the following:
- Savings – if you have enough savings, you may be able to get by without an income. But remember, you could need enough savings to cover you for a long period of time.
- Employer sick pay – always check your written statement of employment carefully to see how much you are entitled to from your employer if you are off sick, and for how long.
- Government benefits – you may be able to survive on government benefits, but think carefully – would benefits cover all of your outgoings? Would you still be able to afford hobbies and holidays?
- Partner support – perhaps your partner earns enough for the two of you, so a drop in income would not particularly affect your lifestyle.
Income Protection from Shepherds Friendly
At Shepherds Friendly, we provide income protection that will cover you up until the age 70.
Our protection offers you a regular tax-free income throughout any period of absence from work. You can even choose to opt for our short – term income protection plan which generally offers lower premiums.
Shepherds Friendly Income Protection – Key Benefits
- You can apply for income protection no matter what your profession and whether you are employed or self-employed.
- If you are employed, you can choose to cover up to a maximum 70% of your regular income. If you are self-employed you can cover up to 70% of your net profit.
- We will support you and help you with your recovery after illness or injury and may be able to refer you to one of our nominated rehabilitation providers.
- Our income protection cover is flexible and can be changed to suit your circumstances.
All references to taxation are based on current legislation which is subject to change.
