The number of people economically inactive because of long-term sickness has risen to over 2.5 million people, an increase of over 400,000 since the start of the coronavirus (COVID-19) pandemic , It’s a significant statistic that highlights the importance of considering income protection insurance. If you rely on your pay check to cover essential expenses, an unexpected illness or injury could severely impact your financial stability. Imagine not being able to work for months or even years—how would you manage? Income protection can be a vital safety net, but is it really worth the investment for everyone? Let’s explore the key factors that could influence your decision.
Income Protection Definition
Income protection is a type of insurance that provides you with a portion of your income if you’re unable to work due to illness or injury. This means that if you find yourself in a situation where a health condition or accident prevents you from earning a living, income protection can keep you financially afloat.
When considering income protection, you’ll need to choose a deferred period, which is the time you wait before making a claim.
Benefits Of Income Protection
When you’re unable to work due to illness or injury, the benefits of income protection can provide essential financial stability. This type of insurance guarantees that you continue to receive a portion of your income, while you’re unable to work.
One of the major benefits of income protection is that it covers a wide range of health conditions and injuries, ensuring you’re protected against unpredictable events. This coverage means you won’t have to rely solely on savings or state benefits, which mightn’t be sufficient to meet your financial needs.
Income protection can also offer partial disability benefits, so if you’re able to return to work part-time but not full-time, you can still receive payments to supplement your reduced income. This flexibility is important for a smoother shift back to full employment.
Additionally, policies can include indexation for inflation protection, ensuring your benefits keep pace with the rising cost of living. Overall, income protection provides security for your family and dependents, making it a valuable safety net.
Is Income Protection Worth It – Self Employed
For self-employed individuals, securing income protection is often essential due to the lack of employer-provided sick pay. Unlike traditional employees, you don’t have the safety net of sick pay if you fall ill or sustain an injury. Income protection insurance for the self-employed guarantees you have financial stability during periods when you can’t work.
Self-employment comes with its own set of risks, and without income protection, a sudden illness or accident could jeopardies your livelihood. Income protection insurance covers a significant portion of your earnings. This means you can maintain your quality of life and continue meeting financial obligations even when your ability to work is compromised.
Choosing the right deferred period is vital. Since you don’t receive sick pay, opting for a shorter deferred period might be beneficial. This ensures that you get the support you need promptly.
Ultimately, having income protection insurance as a self-employed individual offers peace of mind. It’s a safeguard against unpredictable events, providing you and your family with financial security when you need it most. Investing in this coverage isn’t just worth considering; it’s almost a necessity.
Can You Get 100% Income Protection?
You might wonder if it’s possible to get 100% income protection, but the reality is that most policies cap their coverage at around 60% – 65%. This means that income protection insurance won’t fully replace your earnings if you’re unable to work due to illness or injury.
Income protection insurance is designed to provide a safety net by covering a substantial portion of your income. While 60% – 65% mightn’t seem like enough, it’s intended to cover your essential expenses, giving you peace of mind during challenging times. The idea is to maintain your quality of life without the stress of financial instability.
Is Income Protection Better Than Life Insurance?
While income protection provides a safety net for those unable to work due to illness or injury, life insurance serves a different purpose by offering financial security to your loved ones after your death. It’s important to understand the differences to decide which one suits your needs better.
Income protection benefits are invaluable if you’re the primary breadwinner and you rely heavily on your income to cover daily expenses. It guarantees financial stability during incapacity, helping you maintain your quality of life. On the other hand, life insurance guarantees your family is financially secure if the worst happens.
Here’s a quick comparison to help you see the differences:
| Feature | Income Protection | Life Insurance |
| Purpose | Covers lost income due to illness/injury | Provides financial support after death |
| Payment Duration | Until you can return to work or retire | Lump sum upon death |
| Policy Trigger | Inability to work | Death |
| Beneficiaries | You | Your dependents |
Both insurance types serve different but essential roles. Your choice depends on whether you need immediate income protection benefits or long-term financial security for your loved ones.
Options For Purchasing Income Protection
Exploring the landscape of income protection options can seem overwhelming, but understanding where and how to purchase a policy simplifies the process. You can buy income protection directly from an insurer, through a financial advisor, or via a protection advisor.
Directly purchasing from income protection providers gives you control, however, the variety of policies can be confusing, so you need to do thorough research.
Alternatively, financial advisors offer personalised advice tailored to your specific financial situation, helping you navigate the myriad of options.
Protection advisors specialise in insurance products, offering expertise specifically in income protection. They can provide in-depth insights into the nuances of different policies, and help you understand which one aligns best with your needs. While their services might come at a cost, the peace of mind and tailored advice they offer can be invaluable.
Ultimately, the right choice depends on your comfort level with research, your financial situation, and how much personalised advice you need.
I am an independent protection advisor with access to multiple income protection insurers, I don’t charge a penny for my advice so feel free to reach out to me for more information or assistance in getting the right policy for you.
Choosing The Deferred Period: What You Need To Know
Selecting the right deferred period is crucial for tailoring an income protection policy to your specific needs and circumstances. The deferred period, which is the time you need to wait before making a claim, can greatly impact the cost and effectiveness of your policy.
For instance, if your employer offers six months of sick pay, you might opt for a six-month deferred period. This choice reduces your premium since there’s less chance you’ll need to claim frequently. Conversely, if you’re self-employed and don’t receive any sick pay, a shorter deferred period might be more appropriate to make sure you’re covered sooner.
Choosing the right deferred period can balance cost and coverage. A longer deferred period usually means lower premiums but requires you to manage financially for a longer time before the policy kicks in. Evaluate your financial situation, job benefits, and personal needs to make the best choice.
How Long Does Income Protection Pay For?
Income protection can pay out until you’re able to return to work, the policy term ends, or you retire, depending on the term you choose. When selecting a policy, you can opt for short-term or long term income protection. Short-term policies typically pay out for one to two years, while long-term policies can provide benefits until you reach retirement age, typically insurers allow terms up to 69 years of age.
With long term income protection, you’ll have peace of mind knowing that you have a safety net for an extended period. This type of policy is particularly beneficial if you’re self-employed and don’t receive sick pay. It ensures that you can maintain your quality of life and meet your financial obligations, even if you’re unable to work for a prolonged time.
It’s important to carefully consider the duration of coverage you need. A longer coverage period generally comes with higher premiums, but it also offers more extensive financial security. Look at your financial responsibilities and risk factors, such as your health and job type, to determine the best term for you. Choosing the right term can make a significant difference in your overall financial stability during times of incapacity.
Is Income Protection Tax Free?
One of the key advantages of income protection is that the payments you receive are tax free. This means you don’t have to worry about losing a chunk of your benefit to taxes, allowing you to maximise the financial support you get during difficult times.
It’s important to understand how this can impact your overall financial situation, especially when you’re unable to work due to illness or injury.
When considering income protection, it’s vital to know whether your benefits will be taxed. Here’s what you need to keep in mind:
- Tax-Free Payments: Since the payouts from your income protection policy aren’t taxed, you get the full amount you’re entitled to, helping you manage your expenses better.
- Employer Contributions: If your employer pays for your income protection insurance, the premiums might be considered a taxable benefit. It’s advisable to check this detail.
- Self-Employed Benefits: For self-employed individuals, who don’t receive sick pay, this tax-free benefit can be a significant lifeline.
- Policy Terms: Always review the terms of your policy to make sure there are no tax implications you might’ve overlooked.
Understanding these points helps you make an informed decision about income protection and ensures you’re fully aware of how and when your benefits will support you.
What Does Income Protection Not Cover?
When considering income protection, it’s vital to recognise that it doesn’t cover redundancy or job loss. This type of insurance primarily focuses on covering you if you get sick or sustain an injury that prevents you from working. So, if you’re wondering, ‘Does income protection cover redundancy?’ the answer is no.
Income protection also doesn’t cover pre-existing conditions unless specifically included in the policy. It’s important to read the fine print and understand any exclusions before purchasing a plan.
Moreover, some risky hobbies or professions may lead to higher premiums or exclusions. For instance, if you’re an avid skydiver or work in a hazardous environment, be prepared for potential limitations. Always disclose these activities to avoid complications during the claims process.
Understanding these exclusions ensures you’re well-informed and can make the best decision for your financial security.
Frequently Asked Questions
How Does My Age Impact The Cost Of Income Protection?
The older you are, the more likely you’re to make a claim due to illness or injury, which raises the risk for insurers. As a result, you’ll pay higher premiums compared to younger individuals.
Can I Change My Deferred Period After Purchasing The Policy?
Yes, normally you can change your deferred period after purchasing the policy, but it depends on your insurer’s terms and conditions.
You’ll need to contact your insurer to request the change, and they might require underwriting or reassessment of your policy.
Keep in mind that altering the deferred period could impact your premium, with shorter periods generally costing more.
Always review your policy details and consult with your insurer for specific guidance.
Are There Exclusions For Certain Pre-Existing Conditions in Income Protection Policies?
Yes, there are exclusions for certain pre-existing conditions in income protection policies. It’s important to check the specifics before buying. Coverage often excludes conditions you had before taking out the policy.
Review your policy details carefully, as each insurer has different rules about what they’ll cover and what they won’t.
How Do My Hobbies Affect the Cost of Income Protection?
Your hobbies can greatly impact the cost of income protection. Risky activities like skydiving or rock climbing increase premiums because insurers view them as higher-risk.
When you disclose your hobbies, the insurer assesses the likelihood of injury or illness related to those activities. If you have safer hobbies, your premiums might be lower.
Always be honest about your hobbies to guarantee proper coverage and avoid denied claims.
What Happens to My Policy if I Switch Jobs?
You need to inform your insurer about the change.
Your new job might affect your premiums if it’s riskier than your previous one. Always check with your insurer to understand any adjustments.
If your new employer offers better sick pay, you might consider adjusting your deferred period to potentially lower your premiums.
Conclusion
Considering income protection is a smart move if you rely on your earnings to support your lifestyle.
Take John, a self-employed graphic designer, who suffered a serious injury. His income protection covered 65% of his income, allowing him to focus on recovery without financial stress.
It’s tax-free and provides peace of mind, ensuring you and your family are secure during tough times.
Don’t wait for an emergency—secure your future now.
Income protection insurance can get quite complicated at times, you really do need to do thorough research before buying a policy online. If you are not sure on anything you need to seek clarity on any questions or concerns you may have before buying a policy online.
I may be biased as an independent protection advisor, but I strongly encourage you to seek professional advice when purchasing income protection.
I don’t charge a fee for my advice so if you do want some professional advice please get in touch, I have access to multiple insurers and will get you the best price possible.
And as always, if you just have a question you want answered please reach out to me and I will do my best to help.
