Income Protection Insurance is an important safety net. It protects your financial well-being and ensures you have access to regular income if you become ill or injured and are unable to work. However, a one-size-fits-all approach to Income Protection may not offer the right benefit for your unique circumstances. Customising your Income Protection Insurance policy can make a significant difference in the level of peace of mind it provides.
In this article, we will explore how to tailor your Income Protection Policy to suit your individual needs. From assessing your financial situation and selecting the appropriate cover amount to understanding policy features and avoiding common pitfalls, this guide will provide you with the essential steps and considerations to optimise and help with increasing income protection benefits.
How does Income Protection work?
Income Protection Insurance is an insurance policy that allows the policyholder to continue to receive a regular income, if they are unable to work through injury or illness. This income is received on a regular basis - usually monthly - until the policyholder retires, is able to return to work, or the agreed benefit term runs out.
An Income Protection Insurance policy works to replace part of the policy holder’s income if they suffer a loss of earnings due to illness or injury. While the policy doesn’t mean your benefit claimed will equal the total contributions you have made, the payout is typically up to 65% of your monthly income, you can claim as many times as you need to while the policy lasts. What you are buying is financial peace of mind should you get ill or injured.
Assessing your needs
Income Protection Insurance isn’t necessary for everyone. For example, if your employer provides you with sick pay benefit you already have some financial protection. Alternatively, you might want to rely on your savings to cover your regular expenses during your recovery period. Or, if you can live on state benefits, purchasing an Income Protection policy might not be worth it for you.
If, however, you wouldn’t be able to afford your regular expenses without your monthly salary, an Income Protection Insurance policy would be worth considering. Before jumping in though, it is important to evaluate your financial situation, identify your risk factors and assess your needs.
How to evaluate your financial situation
When evaluating your financial situation, it is important that you take into account these three things:
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Monthly expenses: What do your monthly expenses look like? How much are they usually? What are the essential expenses?
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Other regular household income: Do you live with someone who earns enough to temporarily cover your regular expenses if you were to stop working?
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Existing savings and emergency funds: Do you have any money in savings accounts for emergencies? Is it enough to rely on while you recover?
What are my risk factors?
Once you’ve explored your monthly expenses and how much you’d be able to cover without additional income support, you need to identify your risk factors. Your risk factors are characteristics that increase the likelihood of becoming injured or ill and being unable to work, triggering the need for Income Protection Insurance.
Understanding your risk factors is important to ensure you tailor your policy to your unique requirements, and they are also important for the insurer to determine the level of risk they are taking on by insuring you. Higher risk factors can lead to higher premiums and limited policy features to compensate for the increased likelihood of a claim.
There are a number of different risk factors that will affect your policy. However, here are some risk factors that you need to be aware of:
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Occupation: Having a high-risk profession, such as in construction, can mean that you’re more likely to become seriously injured. Similarly, your work environment can impact your risk, as exposure to hazardous conditions can increase the likelihood of illness or injury.
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Age: Older policyholders are usually considered higher risk. However, younger individuals can still face occupation-based risks.
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Health: A pre-existing condition or a family history of certain illnesses can make you a higher risk policyholder, as you’re considered more likely to have to stop working due to these health issues.
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Lifestyle choices: Lifestyle habits such as smoking, alcohol consumption, diet and physical activity can all impact your level of risk. For example, an individual that plays Rugby twice a week is considered more likely to become injured.
Choosing the right cover amount
Once you’ve considered your needs, financial situation and risk factors, it’s time to calculate what amount of cover to have. As we’ve already mentioned, the payout is typically up to 65% of your gross monthly income. The amount you choose will alter your monthly premiums, so it’s important that you choose the right cover amount for you.
Refer back to your needs assessment and consider your monthly expenses, such as bills, food, travel, and other essential costs, to determine the minimum income you need to maintain your lifestyle. Striking a balance between a cover amount that offers adequate financial support while keeping premiums affordable is key to ensure you don’t get yourself into financial trouble. Consulting with a financial advisor can help with this, ensuring you choose a cover amount that provides sufficient protection without stretching your budget.
Customising the deferred period
Your Income Protection Insurance policy will have a deferred (or waiting) period that needs to be completed before the benefit payments can start. You will be able to choose the length of this period. The most common lengths for deferred periods are 4 weeks, 8 weeks, 13 weeks, and 26 weeks, and the longer your waiting period, the cheaper your monthly premiums.
It’s important to be aware of this deferred period, so that you are able to use an alternate source of money for the chosen time, such as savings and emergency funds. Shorter deferred periods are available from some providers, such as us here at Wiltshire Friendly.
Selecting the benefit period
The benefit period is the length of time that you will receive payments from your insurance provider if you were unable to work due to illness or injury. The benefit period can range anywhere from a few years to until you reach retirement age, and choosing the right length of time is important for ensuring that you have enough protection.
Short-term vs. long-term coverage
There are two different types of Income Protection Insurance coverage that you can have:
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Short-term coverage: Usually, short-term coverage is between one and five years. This can be suitable for individuals who have other financial safety nets in place, such as savings or a partner’s income, or those who expect to recover and return to work relatively quickly.
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Long-term coverage: Long-term coverage differs in that rather than providing coverage for a set number of years, it provides payment up to a predetermined age, aligning with your expected retirement age. This option is more beneficial for policyholders with fewer financial resources or higher risk factors that might prevent them from returning to work in the near future.
When determining your benefit period, it’s important to align it with your current career and any retirement plans. If you have a stable job and a long time until you reach retirement age, long-term coverage might be more appropriate. On the other hand, if you plan to retire early or have other savings, a shorter benefit period might be sufficient.
However, just like with your chosen length of deferred period, your benefit period directly impacts your monthly premiums. Longer benefit periods tend to have higher premiums because of the increased potential payout. While short-term benefit periods can be cheaper in the first instance, they may not provide an adequate amount of coverage if you face a prolonged period of absence from your job.
Regular policy reviews
Once you have a policy in place, regular reviews of your Income Protection policy are essential to make sure that it still meets your requirements. Life events such as changing your career, getting married, or having children can significantly impact your financial situation and insurance requirements.
For example, having children can greatly increase your financial responsibilities, meaning that higher coverage might be necessary. Similarly, a career change might affect your income level, meaning that adjustments need to be made to your policy.
Periodically reviewing your policy can help to make sure that it remains aligned with your current circumstances. Your insurance adviser can help you review your changing needs to update your cover amount or adjust your deferred period and benefit periods to make sure you achieve the maximum benefit.
How Wiltshire Friendly can help
Here at Wiltshire Friendly Society, we specialise in Income Protection Insurance solutions to protect a person's income in case the unthinkable happens and you get ill or get injured. We offer Income Protection policies to individuals, employers, and sports players.
We have over 130 years of experience in helping our members to understand Income Protection and take out a policy that is right for them.
If you need to make a claim, apply for increased cover, or discuss your specific requirements, get in touch with us today.