Income Protection – Insuring Your Most Valuable Asset

Protection should always be at the foundation of any financial plan and most working people tend to have some form of life assurance. However equally as important as life cover is Income Protection, a product that is often overlooked.When it comes to illness, it is common for people to have ‘Superman’ or ‘Superwoman’ syndrome. Younger people often believe they are invincible and that ‘it’ will never happen to them. The statistics prove that this is a common misconception, for example: the average age of a person claiming on an income protection policy is 411, and in the UK, nearly 1 million people a year are off work long-term sick2. The most common causes of long-term work absence are stress, mental health and musculoskeletal injuries. Following closely behind these are cancer, stroke and neurological conditions; these conditions often require a long period of absence from work for recovery. How would you survive financially if you suffered from a prolonged period of absence due to one of these?

If you are self-employed the need to protect your income should be reasonably clear. If you are employed, your employer will pay you statutory sick pay (SSP) of £92.05 per week for up to 28 weeks (subject to eligibility). After that, you may be reliant on state benefits. With austerity measures and welfare cuts, state benefits have been systematically eroded. It is extremely unlikely that you could survive on the basic Employment and Support Allowance (ESA), even if you qualified for it. Few employers tend to offer comprehensive sick pay equivalent to your full salary and you may be surprised if you check your entitlement with your company’s HR department. Quite often an employer will only pay an income for a period of a few months. Income Protection can play a valuable role when sick pay ceases. The average length of an Income Protection claim is over 7 years3 indicating that if you are off work with serious illness, employer sick pay and state benefits are likely to be insufficient and should not be relied on.

What Is Income Protection?

In a world where we insure our homes, cars, pets and mobile phones, it is strange that so many people do not insure their most valuable asset, themselves! Income Protection is a policy which can provide you with a regular tax-free income if you are unable to work due to illness. The benefit is paid after a fixed period of illness (the deferred period) and will continue until you are well enough to return to work. This period can be for the whole term of the plan, although there are some budget plans available at a lower cost, that only pay an income for a fixed term (typically between 2 and 5 years). The deferred period will typically be between 4 and 52 weeks, depending on the level of sick pay you receive from your employer (if any) and the level of savings that you can access to help support you through a period of incapacity.

Who Is It Suitable For?

Who may need Income Protection? Why is it needed?
People changing jobs If your salary increases or you do not have the same employer benefits to protect you through a period of illness.
Single people Without a partner to reply on for financial report, there is less likely to be someone to assist with the payment of bills, rent or mortgage payments if you are unable to work.
Homeowners with a mortgage To ensure mortgage payments, council tax & utility bills can be paid if you are unable to work due to illness.
Stay-at-home parent/Family To replace the cost of looking after the children and housekeeping in the event of a serious illness or disability making this more difficult. You do not need to be working to take out Income Protection but the level of cover will be restricted if you are a ‘houseperson’.
Self-Employed A long-term illness or injury could threaten your livelihood, deplete your savings and be a financial disaster.
Employees with limited sick pay To replace lost income when employer sick pay reduces or stops.

How Much Cover Do You Need?

If you want to ensure that there is no change to the quality of your life if you suffer from an illness, then the level of cover should reflect your monthly expenditure. It is generally not possible to cover more than 55% of your gross income, as income protection benefit is paid free of income tax. If you are employed it is essential that you fully understand the level of sick pay that you will receive from your employer to ensure you are not ‘over-insured’.

What Is The Cost?

Like most insurance, the level of cover can be dictated by affordability. The cost is based on several factors such as age, health, lifestyle, term of plan and your occupation. Although this type of insurance can be expensive, the cost can be reduced by selecting a longer deferred period. If you have a reasonable level of savings this could be a consideration. The cost could also be reduced by selecting a lower level of cover that just covers essential monthly outgoings, rather than luxuries.

Features & Benefits

Some providers will only pay a claim if you’re unable to do ‘any’ occupation or one that your skills are ‘suited’ to. We would always recommend Income Protection cover on an ‘own’ occupation basis as this ensures any claim will be paid out if you cannot do your ‘own’ occupation. This ensures that you are not forced to take a job that you do not want during a period of illness.

Some policies have additional features included in the cost. Rehabilitation Benefit can help you back to work in the event of a claim with the insurer providing medical specialists that can assist with treatment and well-being. Hospitalisation benefit can pay an additional cash amount for each day you are in hospital, even outside of the normal deferred period for claims.

Summary

An open discussion about planning for sickness or injury is vital to building a long-term and comprehensive financial plan. If you are unable to work due to illness and your income is not protected, there is a very real risk of your whole financial plan falling apart. Without an income, you may not be able to afford to pay the premiums for life cover or continue pension contributions, which could leave the financial future for you and your family in jeopardy.

If you have an existing policy, it is important to review whether your policy covers you for a suitable amount and that it provides comprehensive cover if you cannot perform your own occupation. We can assist with recommending the most appropriate level of cover to meet your needs. If you are employed, we can also ensure that any claim commences at the end of your employer’s sick pay and that you are not over-insured. We can recommend the best policy for you, explain different features and benefits and ensure important details like covering your ‘own occupation’ are not missed.

The content of this article is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.

Footnotes:

  1. Legal & General Claims Department 2018
  2. Long-term sickness absence in GB – review by Department for Work and Pensions 2 CIPD Absence Management survey report 2015
  3. Liverpool & Victoria Claims Department 2017