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Income Protection

Income protection covers your monthly outgoings in the event you are unable to work due to any illness or accident. Let’s face it you are more likely to be off work sick than you are to pass away before retirement.
Insurers will pay you a percentage of your wage each month to assist your lifestyle and keep a roof over your head while you are signed off work sick.
Different insurers pay out different percentages of your salary and certain insurers are more lenient based on your occupation. This is where we add value to the process by making sure that you are on a suitable product for your own individual circumstances.

Income Protection options

Monthly Benefit

This is the amount of money you will receive tax free should you find yourself unable to work due to illness or injury. When selecting your monthly benefit it’s important that you add up all your essential outgoings such as mortgage/rent, utility bills and food shopping. Generally speaking the higher the level of cover required, the higher the monthly premiums will be.

Deferred Period

The deferred period simply means the length of time you need to wait after getting sick or injured before your claim starts. Generally speaking the deferred period would tie in with any sick pay benefit from your employer so that your income protection claim starts once the pay from your employer ceases. If you are self employed you could set this waiting period to kick in after 1 week, so for example if you were off work for 3 weeks then you would be paid out for 2 of the 3 weeks. As a rule of thumb the longer the deferred period is the cheaper the premiums will be.

Policy Term

The next thing to select is the policy length which means how long you will have the cover for. The idea of the term is to protect your income for a set period of time, typically until retirement or until the end of a specific liability such as a mortgage term. The older you become the more likely it is you’ll need to claim and so a longer term generally means higher premiums.

Premium Type

There are three main types of premiums available for income protection as opposed to car or home insurance where there is only one option.

Guaranteed premiums tend to start off a bit higher in cost to the other options but the insurer cannot increase them over the term of your plan. This generally means that although guaranteed premiums work out a bit more expensive at the start of the policy, they could work out cheaper over the life of the policy as the cost is locked in from the outset.

Reviewable premiums are reviewed annually based on a number of factors such as an unexpected increase in claims for example. These premiums may look attractive as they initially start lower than guaranteed premiums but will increase year on year and typically work out more expensive than the guaranteed premiums over the term of the plan.

Age-costed premiums also generally start cheaper than guaranteed premiums but will increase once each year based on you being one year older. Unlike reviewable premiums the age-costed premiums will only rise by a pre-set amount laid out in your policy documents. This reflects the fact that the older you become the more likely it is that you’ll need to claim.

Payout length

Another factor to consider which will affect the price is how long you want a maximum claim to last for. Typically a claim will pay out for a maximum of 1 year, 2 years, 5 years or all the way until retirement with the full term option. Generally speaking the longer the payout period required the higher the monthly premium.

Index Linked option

Over time money loses its value. A pint of milk which cost around 15p in 1979 is now around 55p.
Index linking your policy doesn’t affect the price at the beginning but it means that your level of cover will increase in value once per year to keep up with the cost of living which is the good news. The only downside is the amount you pay for index linked premiums also goes up annually in line with the increase in cover.

Example of Income Protection Premiums

The monthly cost of income protection can vary dependent on age, health, occupation, smoker status , level of cover and various other factors discussed above.

Below we have shown how much income protection would cost for an office worker (accountant) and a manual worker (construction) based on 5 different ages.

To put together this point of reference we’ve had to make a number of assumptions:

  • The client is applying for a £1500 monthly benefit.
  • The client wants a guaranteed premium that will never increase (unless they have opted to index link the cover).
  • The client wants the plan to run until age 65 with a pay-out period up to 2 years per claim with unlimited claims allowed during the term.
  • The client has opted for a 4 week deferred period.
  • The client is a non-smoker.
  • The client is covered on an “Own Occupation” basis meaning they’ll get a pay-out if they are medically unable to do their own specific job.
  • Prices are shown as monthly premiums expected
Age at application 25 30 35 40 45
Accountant £12.03 £14.85 £19.00 £24.27 £27.53
Builder £33.93 £38.18 £50.29 £60.55 £77.23

If you’re off work due to an illness or injury how would you cope financially paying your essential bills?

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