Income Protection Insurance
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What is Income Protection Insurance?
Income protection insurance is a type of short-term or long-term coverage (depending on your policy) that pays you an income if you’re unable to work due to injury or sickness. Some policies may also cover redundancies, but not all insurers provide this coverage. Income protection coverage generally offers to pay out until you return to work, retire or die.
What Do You Need To Know About Income Protection Insurance?
Have you considered income protection? What would happen if you were injured or sick, and couldn’t work? How would you pay the bills? Income protection insurance may be able to offer coverage you need.
Who Can Get an Income Protection Policy?
You can apply for this type of protection if:
- You have a full-time position
- You have a part-time position
- You’re self-employed
As long as you have a regular income, you’re eligible to buy an income protection insurance policy.
Do I Need Income Insurance Protection Insurance?
The answer to this question depends. If you have another way to replace your income if you’re unable to work, a healthy savings account, for instance, then you may not need to consider this type of policy.
Who Doesn’t Need Income Protection Insurance?
As well as having a healthy savings account, you may not need income protection insurance in these cases:
- Government benefits: if you have good benefits to see you through, though they may not cover all of your expenses or the length of time you’re unable to work.
- Sick pay: if your position comes with a generous amount of sick pay, you may be able to get by. This would mean you’d need employee benefits that would last 12 months or more.
- Early retirement: if you’re nearing retirement age, you may be able to retire early. You may be able to get your retirement payments early.
- Partner or family support: if your partner or family makes enough money to cover everything, this could also work.
If you have these backups available when you need it, then they may get you through. However, none of these cases are always dependable. For instance, if you’re not close to retirement, that option may not work to cover your income. Or if your partner and/or family are unable to support you, how would you pay your bills?
This is why income protection insurance is of such great importance for both you and your family. You’re protected in the event you’re unable to work. You’ll still have income and not have to worry about the bills.
What Types of Income Protection Insurance are Available?
When you begin researching this type of coverage, you’ll find there are basically two types of income protection insurance:
- Short-term protection: also called Accident, Sickness and Unemployment (ASU) coverage: if you lose your job, become ill or suffer an injury due to accident, this type of policy covers your living expenses, including mortgage/rent, debts, etc. This policy is short-term and usually pays out over the course of 6 to 12 months.
- Long-term protection: covers your income for as long as the policy allows. This period will depend on the individual policy, but most insurers offer policies that pay out up your retirement or for a set number of years (such as 40 years, for instance).
How Much Coverage Do I Need?
In this case, many insurance providers allow you to decide on the amount of coverage you’ll need, or you can choose a percentage of your current annual income. Keep in mind that many insurance companies do have an upper limit, beyond which they will not cover you.
In preparation for deciding how much cover you may need, it can be helpful to create a budget to see exactly what expenses you have and need to cover. Be sure to include everything in your budget—all of your expenses, including mortgage/rent, groceries, utilities, insurance (all—car, home, health, etc.), and any other monthly expenditures you may have. This way, you’ll know exactly how much income protection insurance you need now and may need in the future.
Which Term of Coverage is Right for Me?
Choosing the right term of coverage is determined by what you believe will be needed should you become unable to work. Things to consider:
- Short-term income protection insurance only pays out for a limited time, making this a cheaper option for many people. On the other hand, long-term insurance pays for a long time, covering your income up for up to several years (depending on the policy specifics) if you’re unable to work.
- Many people tend to choose the cheaper option, which is good. It’s better to have some level of protection than none. However, consider that it’s difficult to know what risks you face ahead. If you are unable to work for a short time, then the short-term income protection may be the best option. If you’re injured or ill for a longer period, then it’s better to choose the long-term protection.
What Else Do Some Income Protection Policies Cover?
You may find some policies that offer these types of benefits with their income protection plans:
Hospitalisation: if you need to be hospitalized, your insurance may give you a portion of your income protection, even if the deferment period is over.
Waiver of premiums: if you need to place a claim, some policies don’t require you to pay premiums
Life insurance: many policies come with some level of life insurance, which usually comes out to 1-2 years of monthly premiums.
No deferral period: if you’ve made a claim, but are reinjured or become ill again within 12 months, some insurance providers waive the deferred period. In this case, you won’t have to wait for the payout.
How Much Does Income Protection Insurance Cost?
The cost will depend on the term of coverage you choose, along with the length of deferred payments. Other factors that effect your premium cost include:
- Age: younger people will generally have cheaper premiums
- Health: you may be required to complete a medical health questionnaire when applying. You may be asked questions about whether you smoke (or have smoked in the past ), what health issues you have, etc. Generally, the better your health, the lower your monthly premiums will be.
- Income needed: the higher the amount you need, the higher your premium will be.
- Length of coverage: choosing a shorter term will keep your premiums lower.
Finding the Right Income Protection Policy for You
One of the best ways to make your search a little faster and easier is to check out an online insurance comparison site. Look for insurance providers who specialize in income protection policies. Once you have a list of providers, it’s a good idea to call or visit each one. Speak with an insurance agent before making your purchase.
After you’ve found the right policy, ask the provider if they offer a discount when you purchase the insurance through their website. Many insurers offer this service, which can save you some money on premiums.
Searching for the right income protection insurance policy is well worth the effort. You’ll know you have an income, even if you’re unable to work.
What is the Deferred Period?
The deferred period is a term you’ll come across as you research income protection insurance. The deferment period is the time between when you make a claim and begin receiving insurance payments after suffering an illness, accident, etc. and are unable to work.
The period varies but is usually between 6 to 12 months. One thing to keep is mind is that the longer your deferment period, the cheaper your insurance premiums will be.
For example, if you’re injured on the job or become ill and unable to work, then your employer likely has an employee sick pay plan. Check with your employer to see how long your sick pay would last. Let’s say you’ll receive sick pay for 6 months. During this time, your sick pay would work to cover you.
When sick pay runs out, then the income protection insurance would begin to provide you with income while you’re unable to work. If you choose the short-term insurance, it only will pay for a specific amount of time, even if you’re unable to go back to work once the support ends. However, if you choose the long-term coverage, the income protection insurance will continue to pay for year, or as determined by the specific policy.
A longer deferment period can help to lower your monthly premium no matter which income insurance protection term you choose.
Stepped Benefits Income Protection
The previous scenario is an example of a stepped benefits plan. Another example might be that your employee sick pay covers you in full for a specific amount of time. After that, the payments decrease what you’re paid. When this happens, your income protection plan will step in and pay you, based on the type of policy you’ve chosen.
This is a great way to work in the deferment period and use up sick pay from your employer. Not only that, but your insurance premiums will be lower, too, if the deferment period is longer.
Helpful Links: Insurance Associations
ABI – Association of British Insurers – The Association of British Insurers is the leading trade association for insurers and providers of long term savings. … need to contact their insurer for a Green Card which they will need to carry on them if they wish to drive their vehicle in the EU.
BIBA – British Insurance Brokers’ Association – The British Insurance Brokers’ Association (BIBA) is the UK ‘s leading general insurance organisation.
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