Income protection is a type of insurance that pays out a monthly benefit to replace lost earnings if you have to take time out of work as a result of illness or injury.
It is possible to take out a plan that could pay out for up to 12 or 24 months, or even up until the age you expect to retire if you are too ill to return to work.
The importance of income protection is highlighted by research from the insurer Unum. It asserts that up to one million workers become incapacitated each year, and half are still incapacitated a year later*.
No sick pay or employer provided benefits
Sole traders and sole directors of limited companies usually do not have the comfort of sick pay or employer provided insurance benefits, making it is wise to consider taking out cover in the personal insurance market.
Andrew Jenkinson, independent advisor at Drewberry Insurance, says: “Income protection is particularly popular with the self-employed who often feel vulnerable without the support of an employer or those who have given up their employee benefits package to start their own business.”
Won’t the government look after me?
The answer to this question is ‘yes and no’. State incapacity benefit, in the form of the Employment and Support Allowance (ESA) is a difficult benefit to obtain, with 66% of applicants for the benefit being rejected in 2010*.
In any case, even for those who are successful, basic rate ESA is only £94.25 per week (for the tax year 2011/12), which would mean a fall in net income of well over 80% for those earning £40,000 per annum.
What does income protection cover?
For the vast majority of occupations it is possible to gain cover with the ‘own occupation’ definition of incapacity, which means that the plan would pay out for practically any medical condition that prevents you from work in your actual job function.
This means that all illnesses and injuries would be covered if it prevented you from working, whether that illness or injury was obtained in the workplace or not. The only real exclusion across insurers is self-harm.
Tips to lower your premiums
When looking to take out income protection there are a number of important policy options to consider that can have a large impact on the premiums charged by insurers, such as the following:
• Amount of cover: Although it is possible to cover up to 50 to 60% of gross personal earnings, depending on the insurer, it makes sense to consider how much you would actually need to cover your essential monthly costs;
• Length of cover: It is common to set the termination age of the plan at age 65 as this is the traditional retirement age, however, if you plan to retire earlier bringing the termination age down can reduce the premiums considerably;
• Deferred period: With no sick pay entitlement the self-employed often want the plan to kick-in after the shortest deferred period of four weeks. However, increasing the deferred period to 13 weeks can lower the premiums by as much as 40%;
• Short-term cover: Traditionally, income protection plans would only limit the payout period to the policy cease age. However, there are some plans available now that could pay out for a maximum period of 24 months, which can lower the premiums significantly.
If you have any kind of pre-existing medical condition, even if it seems minor in nature (such as high blood pressure), it is important to run through with an independent adviser.
Different insurers can treat medical conditions very in a number of ways. For example, one insurer may be happy to provide cover with standard terms and premiums whereas another insurer may want to place an exclusion on the plan or increase the premiums charged.