Income protection insurance is a long-term insurance policy which is designed to help if you can’t work because of an illness of injury. It ensures that you still have a reliable and regular income should the worst ever happen and you’re unable to work. With income protection insurance, you’ll continue to take an income until you retire or return to work.
Income protection is a flexible and powerful form of insurance. It aims to answer one important question:
Who is going to pay the bills if you cannot work? Answer? Your income protection policy payout will cover the bills (up to a point).
Income protection insurance pays you a regular income if you have to stop working because of accident, sickness or unemployment through redundancy – Not to be confused with critical illness insurance or life insurance.
Another key question: how much does income protection pay out? The answer is that a payout of 50-100% of your monthly income is made every month for a set term. 65% is a standard industry % used.
The length of the term of payouts depends on the policy. It can range from a maximum of 12 months to a maximum of indefinitely. Note too that often there applies an upper limit on how much income you can insure, as well as an upper age limit on the individual (commonly 63-65 years old).
Income protection policies are available for individuals in conventional employment with a single employer as well as for the self-employed.
Income protection insurance claims will often require documentation from your GP or healthcare professional before a claim can be paid out.
There are two main types of income protection coverage:
For both types, the insurer will usually issue a monthly payout of 65% of your monthly income in the event of you being unable to work for reasons beyond your control: accidents, sickness, unemployment.
The major differences between ASU and standard income protection are cost and length of coverage:
For short-term coverage (of between 12-24 months), there are ASU policies. These are often referred to as short-term income protection policies.
Standard income protection policies tend to be more expensive than ASU policies. And that is because they last longer. “Generally, income protection will pay you indefinitely until you can return to your job, find another job or even until you retire.” (money.co.uk)
The price you will personally get depends on you as an individual and how likely it is that the insurer will need to pay out to you eventually. Don’t rule out a medical test, especially for policies with indefinite payout terms.
Factors which insurers take into account when calculating income protection premiums include:
The two top factors in determining the cost of income protection are age and the length of the deferred period.
With age, the situation is simple – the older you are, the higher your premium will be.
With the deferred period, the higher premium you are prepared to pay, the sooner you will start getting payouts after you have declared yourself unfit to work. The deferred period can be as short as one week and as long as an entire year.
In the UK, generally yes – payouts from insurers as part of income protection policies are tax free.
But the cost of premiums to you is not generally tax free; you will not be able to claim these costs back against your tax bill.
Personal taxation is a complex topic and varies from individual to individual. An accountant or IFA can help judge your unique situation and assess what rules apply.
Generally income protection policies are considered to be good value for money and the financial support is meaningful when you need it.
Ideally, discuss with your IFA how income protection might fit into your personal investment strategy.
Holborn Assets, one of the UK’s leading independent financial service providers, has received the Pensions Transfer Gold Standard award. The award symbolises Holborn’s commitment to providing the highest standards of advice and service for Defined Benefit pension transfers. The Pensions Transfer Gold Standard was introduced by the Personal Finance Society. […]
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