Have you ever considered what your largest asset is? You may not have thought about it, but your income is by far the largest asset in your possession. Nevertheless, we generally tend to neglect protecting our income. Protecting our income with insurance far exceeds protecting our home or protecting our business, however, we would never consider not protecting our home. But ask yourself this question, “how would you pay your monthly bills if you got sick or your had an accident and couldn’t continue to work”. After all your employer’s sick pay will only get you so far.
Most people think about ‘death cover’ when they think about Income Protection Insurance. However, the term disability is generally overlooked. Various studies have shown that there is six times more probability of an employee becoming disabled on the job like manual jobs in the construction industry than of dying on the job. A recent statistic from UK insurance agency Aviva, showed that in 2017, 83% percent of people insured their homes, but only 31% insured their income.
If the unexpected were to even happen, there is considerable peace of mind in the knowledge that you are able to maintain your current lifestyle, no matter what. You would also want to feel reassured about going back to work after an incident, in a reduced capacity or on a lower salary. An insurance cover that protects you in these eventualities is known an Income Protection Cover. And unlike what most people believe about Income Protection, its not only for the old. Studies show that over half of the claims made in the UK during 2017, were from professional under the age of 35. However, what is true is that a majority of claimant under Income Protection are blue collar workers. Its no surprise that individuals who perform manual work are more prone to incidents in the workplace, with accidents being the number one cause of ‘disability at work’.
Income Protection Cover or IP as it is more popularly known, is insurance cover in the eventuality that you cannot continue your employment for medium or long-term illness or injury. Individuals with Income Protections are generally protected under three circumstances that they can pick from:
You can generally protect up to 75% of your gross yearly income and is available on short term or long-term cover. This calculation is made after the single person’s Social Welfare Disability Benefit is calculated in the gross pay. It is not possible to get full 100% cover, for higher cover amount, a higher premium is calculated. If you are out of work for more than the deferred period of work, which usually last from 8 to 52 weeks, then the cover stops.
For anyone who wants to cover their income with Income Protection Insurance, whether they are in a small business, or a sole trader in case they fall behind with their monthly payments, Income Protection is a vital cover to protect themselves and their dependents. It is ironically found that Income Protection is high on priority with many people, they just haven’t got down to doing something about it. Simply ask yourself, “If I can’t work then how will I be able to pay for my mortgage, my bills, my food and my family’s other needs?”. Of all the Income Protection Insurance available, protecting your earning is by far the most important.
People generally consider Income Protection before its too late. Income Protection is typically considered in the following situation:
There are many companies offering Income Protection Insurance with various rates and offers. Some of the available companies are-
All these companies offer insurance on your income depending on your requirements and current income.
Income Protection will only cover you up to a maximum age of 70. This age is generally considered as the ‘retirement age’. However, most people prefer a specified period of time which is linked to their home mortgage or other financial obligations. Nevertheless, you need not be stuck with the policy till you are 70 years old, and cover applies as long as you pay the premiums.
As a rule of thumb, the longer the policy term, the higher the premium is likely to cost. Short-term income policies give you pay-outs for a set period of time which his generally between six and twelve months. Long term income policies provide cover for you for an indefinite period of time, this generally applies if you are too ill to work or are unable to return.
This is generally dependant on your current circumstance and your monthly expenditures like mortgages, loans etc. Like explained earlier, the maximum amount that you can recover for your income is 75% of your gross yearly income. If you decide to insure a smaller percentage of your income, your premium will reduce depending upon the income amount you cover. In some cases, you might also have the option to protect employment benefits like official car, holiday bonuses etc. These benefits are also known as P11D benefits.
Note: Income Protection pay-outs are generally tax free, so its important not to under/overestimate the pay-out amount.
There are various Income Protection policies available in the market. Insurance providers name these policies with various benefits and features in mind. However, most policies come under two basic categories:
1. Level Cover
In this form of Income Protection, the amount that you are covered under is fixed when you begin paying premiums. This amount wont change in the future as it is not linked to inflation and will give you less purchasing power in the future.
2. Inflation-linked Cover
In this form of Income Protection, the amount that you are covered under and future premiums increase with rising inflations. In this form of Cover the premiums are calculated based on Retail Price Index (RPI).
The Income protection cover allows individual to choose between two types of premium payment plans:
1. Guaranteed Premium Plan
In this plan, your premiums will not change, and you won’t have an option to modify your premium in case of a salary increases or bonuses in the future. If you have chosen, the inflation-linked cover then your premium will increase only by inflation every year based on RPI.
2. Reviewable Premium Plan
This type of premium changes based on various assumptions. The premiums will be under review after the first 5 years and a new primum amount may be suggested based on these assumptions (mentioned below). Based on these assumptions your premiums could either go up or go down. If you have chosen, the inflation-linked cover then your premium will increase only by inflation every year based on RPI.
Insurance Providers will generally consider the following points before deciding the premium amount under the reviewable premium plan:
Note: Depending on your specific requirement, you may be offered specific products to meet these requirements. These products are not over encompassing and target specific areas of debit liability. These include, Mortgage Protection , Unemployment Protection, Credit card Protection and more.
As discussed earlier, the amount of premium payable will largely depend on various criteria set by the insurance company. Nevertheless, there are somethings to keep in mind that may adversely or positively affect your premium calculation.
Age plays a very big role in deciding your premium. Statistically, the older you get, the more likely you are to file a claim.
Your occupations plays are huge role is deciding your premium. In some cases, your application for Income Protection and be out rightly rejected simply on the basis of the occupation being too ‘high risk’. Jobs like law enforcement officers, firefighters, and truck drivers will invariably pay a higher premium then office workers, IT technicians and teachers.
The insurance will mandatorily ask you to take a full health test before they decide your premium amount. Any medical history like type 1 Diabetes will drastically increase your premium amount.
Smoking or Alcohol Consumption
There are various studies that have linked smoking and alcohol consumption to cancer and other life threating diseases. If you are a smoker or consume alcohol up to a certain amount your premium amount is likely to double of that a non-smoker.
If you have chosen a flexible reviewable plan, it is a good idea to review the sum assured amount from time to time. A salary increase is probably the most common period when the need for a review arises. Yearly bonuses and other office perks can also be added as part of your gross salary. Keep in mind that you will be required to show document proof like salary slips or bank statements to validate the salary increase. If you have chosen an inflation linked protection plan, ensure that you are checking it regularly so that it meets your specific monetary requirements.
Although, you may never know when the need arises and Income Protection maybe the differentiating factor that keeps you from total insolvency. However, there are situations when you would want to consider not buying Income Protection:
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