More and more people are recognising the need to invest in Income Protection Insurance to protect their finances and families in case they are unable to work due to illness or injury. However, there are still some questions and misconceptions that people might have.
In this article, we are going to run through some common misconceptions about Income Protection Insurance and bust some myths that are incorrect! Let’s get into it!
Misconception #1: Income Protection Insurance is the same as Life Insurance
We’ve spoken before about the differences between Income Protection Insurance and Life Insurance. Life Insurance and Income Protection Insurance are two completely different policies, and already owning one should not stop you from purchasing the other.
Income Protection Insurance is a long-term plan that provides the policy-holder with a consistent stream of income if they cannot work due to illness or injury. It is paid out in regular instalments, and usually starts on completion of the waiting period. The most common waiting periods are 4, 8, 13, and 26 weeks, and the longer this period is, the lower the monthly premiums are. Some providers, including us here at Wiltshire Friendly, do have individual plans with a shorter waiting period, if necessary.
On the other hand, life insurance is a lump sum, paid out to predetermined beneficiaries in the event of death. This money is designed to help cover funeral expenses, outstanding debts, medical bills and ongoing financial requirements.
Misconception #2: Income Protection Insurance can’t be put towards your mortgage
Because there is the option to purchase Mortgage Payment Protection Insurance, a specific policy designed to help with payments towards your mortgage during illness, injury or redundancy, people might believe that you can’t put any Income Protection payments towards your mortgage.
However, this isn’t the case, you are free to use your Income Protection Insurance payment for whatever you want - including your mortgage.
Misconception #3: Income Protection Insurance will pay out immediately
Income Protection Insurance policies don’t usually pay out immediately. There is a deferred - or waiting - period that you choose that determines when your benefit payment starts. The longer your deferred period, the cheaper the monthly premiums will be, so choosing an extended waiting period can be an easy way of lowering the monthly cost of your policy. However, it does mean you will be waiting longer for the replacement income, so it’s important to link to your needs and your budget.
Misconception #4: Income Protection Insurance will still pay out if you’re made redundant
Unfortunately, Income Protection Insurance policies will not pay out if you're made redundant. These policies are designed to pay claimants if they are unable to work due to an illness or injury, and so they miss out on a regular income.
However, there are other types of insurance that allows you to insure yourself against redundancy, through Redundancy Insurance. These policies provide money for you to live on after you have been made redundant, before you find yourself a new job.
Misconception #5: You can’t take out Income Protection Insurance if you’re self-employed
The idea that you can’t purchase Income Protection Insurance if you’re self-employed is a total myth. In fact, Income Protection Insurance could be even more useful for those who are self-employed, as often they don’t have access to the same benefits as employees - such as sick leave provided by the employer.
Self-employed individuals simply take out an Individual Income Protection Insurance policy. This will provide regular income replacement if you’re unable to work due to being unwell.
Misconception #6: Your entire salary is covered by your Income Protection policy
Unfortunately, Income Protection Insurance policies are unable to cover your entire salary. Instead, you will receive a regular amount that is usually up to 65% of your monthly income. This is in order to keep the cost of the monthly premiums at a reasonable level, and incentivises the policy holder to return to work.
The bright side, though, is that these payments to individual policyholders are usually tax free (under current HMRC rules)!
Misconception #7: Pre-existing conditions are not covered by income protection
To argue that you cannot get Income Protection for pre-existing conditions isn’t entirely true. Depending on the policy and provider, sometimes pre-existing medical conditions are covered, but there could be higher premiums because of the added risk.
When you purchase Income Protection Insurance, you need to disclose any existing health conditions. The insurer will then make a decision over whether they can cover you and add any conditions they see necessary.
Whether you can get cover for a pre-existing condition can depend on a number of different factors, including its severity and how it’s managed.
Misconception #8: Income Protection Insurance is the same as Critical Illness Insurance
Just like with Life Insurance, Critical Illness Insurance is a completely different policy from Income Protection Insurance.
Critical Illness cover provides a lump sum if you are diagnosed with a specified medical condition such as cancer, heart attacks, strokes or other major medical issues.
Where Income Protection Insurance pays a regular sum of money to the claimant, a Critical Illness policy provides one-time payment upon the diagnosis of a covered critical illness.
Income Protection Insurance explained
Still got some questions? Let’s quickly run over everything you need to know about Income Protection Insurance:
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Provides financial support if you're unable to work due to illness or injury.
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Typically covers up to 65% of your gross salary.
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A deferred (or waiting) period has to be completed before benefits begin, usually ranging from a few weeks to several months. More immediate cover is available from some providers.
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Payouts can last for a set period or until retirement age, or a return to work, depending on the policy.
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Premiums can vary based on cover amount, deferred period, age, occupation, and health.
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Individual policyholders' benefits are usually tax-free, under current HMRC rules.
How Wiltshire Friendly can help
Here at Wiltshire Friendly Society, we specialise in Income Protection Insurance solutions helping people receive a regular stream of income if they’re signed off work sick. We can provide Income Protection plans to individuals, employers, and sports players at various levels, including amateurs, semi-professionals, and professionals who are unable to work due to an illness or injury.
Should you need to make a claim, apply for increased coverage, or discuss your specific requirements, get in touch with us today.