At Wiltshire Friendly, we specialise in income protection insurance for individuals, sports players and businesses, but did you know that there are multiple different types?
In this article, we will explore the various different types of income protection insurance available in the marketplace so that you are able to make an informed decision about which type is right for you. Let’s get into it!
What is Income Protection insurance?
Income Protection insurance is designed to provide you with an income in the event that you have a serious injury or illness which prevents you from working. It is sometimes referred to as accident and sickness cover, and occasionally, accident, sickness and unemployment cover where the policy also pays out in the event that you are made redundant.
Payments can be set to a maximum percentage (set by the insurance company or government limits) amount of your current salary, or a figure that you are comfortable will enable you to pay bills and any care-related expenses in the event of long-term sickness or injury meaning that you are unable to work for a period of time. Alternatively, it can be taken to protect only your mortgage or other loan repayments.
Why is Income Protection insurance needed?
According to Statistica, a global data and business intelligence platform, in July 2023, there were 2.6 million people unable to work due to health problems in the UK. This figure equates to one in every thirteen people working being on long-term sick leave. Whilst Statutory Sick Pay (SSP) is often paid by employers, this is currently just over £100 per week. For most people, that figure would simply not cover all of their outgoings.
In addition, the ONS released information in December 2023 stating that 3.6 out of every 1000 employees had been made redundant. It might be possible to obtain further employment, however, this can take time. Job Seekers Allowance is currently paid to the over 25s at a rate of £84.80 per week, however, there are certain eligibility criteria in order to apply for this.
What do I need to consider before taking out Income Protection insurance?
As with any insurance product, it is important to ensure that the policy is right for you. You may wish to firstly consider the following:
Employer benefits
Some employers will pay more than SSP as an added employee benefit, however, this can be time-limited. Income Protection insurance can be taken out with a deferred period, so it will kick in when your employer reverts to standard SSP.
Other insurances
You might have a similar policy which protects your mortgage or other loan payments. This might be a specific mortgage protection policy or one that is combined with another policy. Critical illness policies pay out in a similar way, but only for certain conditions, such as cancer. This cover might be combined with your life insurance or as a stand-alone policy, but won’t cover for general ill-health or accidents.
Savings
You might feel that you could utilise savings in the event of an accident or sickness. Whilst this is possible, it is tempting to use the savings instead of leaving them for a situation which may or may not happen. You may also not have sufficient funds for a very long period of ill-health, especially if you have needed to use the funds for another emergency.
The different types of Income Protection
Commonly known as income protection, the following types of protection can also be taken out just to cover part of all of the costs associated with your mortgage payments if you stop earning. This type of protection is specifically known as Mortgage Payment Protection (MPP), and there is also similar cover available to cover only the repayment of loans, known as Payment Protection insurance (PPI).
Accident and Sickness cover
This cover provides you with an alternative monthly income whilst you are unable to work.
Unemployment cover
If you lose your job through no fault of your own, this cover will provide you with a tax-free income to replace your lost earnings. It does not cover voluntary redundancy.
Accident, sickness and unemployment (ASU)
As the name suggests, this is a combination policy. It will pay out in the event of illness, accident or redundancy.
Guaranteed income protection
The monthly premium for your policy is guaranteed unless you wish to change the level of cover. It can be more expensive at the start of your policy, but it can be cheaper overall if you plan to have the policy for a long period.
Reviewable income protection
As the name suggests, the policy is reviewed periodically by the insurer. As time goes on, the policy premiums are likely to increase as the likelihood of you making a claim on your income protection policy (see below - Income Protection terms and policy specifics) may well increase.
Index-linked income protection
Both your premiums and any subsequent payouts are tracked to a specific index, such as the Consumer Price Index. This means that what you pay, and if you make a claim, what you receive are both protected from inflation as they will increase or decrease depending on current economic activity.
Income Protection terms and policy specifics
When considering any income protection policy, it is likely that you will come across various terminology and policy specifics. It is important to understand the implications of such terms and conditions before taking out any policy to ensure that it will meet your needs in the event of a claim.
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Deferment period – this is the length of time before a policy will pay out after a situation has arisen (illness, accident or redundancy). A longer deferment period will usually lower your premiums.
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Length of term – long-term protection policies will typically be more expensive as there is a greater likelihood that you might need to claim. MMP and PPI policies can only be set up for a maximum period of the mortgage or loan that they are protecting.
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Salary coverage – income protection policies can be taken out to cover much of your income, however, as they are paid tax-free, insurance providers will usually set a maximum limit of 65-70% of your salary. The greater percentage of your salary that you protect, the higher the monthly premiums will be.
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Your role – depending on what you do and the risks your job entails, your premiums are likely to be higher. Builders and mechanics, for example, tend to pay more than an office worker as statistically, they are more likely to have accidents whilst working.
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Your health – similarly, if you are of poorer health, or have a risk of health issues due to family history, smoking or height/weight ratios, for example, premiums may well be higher.
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Your age – as you age, there are some diseases and illnesses which may impact your ability to work more than a younger person. This therefore impacts policy premiums.
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Your lifestyle – someone who takes part in extreme sports is more likely to suffer injuries which may stop you working, so policy providers will ask about your hobbies and activities.
How Wiltshire Friendly can help
Wiltshire Friendly specialises in income protection insurance for a diverse range of individuals, employers and amateur, semi-professional and professional rugby players.
To discuss your specific needs with us, we encourage you to get in contact us today.