What is Income Protection Insurance?
Income protection insurance is a type of policy that pays out should you be unable to work due to injury, illness, or other unforeseen circumstances. It provides financial help during periods when income is reduced and replaces up to 65% of your income until such time as you are able to return to work.
How Does Income Protection Insurance Work?
The income payments are calculated based on the insured’s salary prior to their income loss and will generally be around 50-65% of their original income.
It pays regular income-protection income benefits until you can return to work, retire or die, whichever comes first.
The income benefit is paid in monthly instalments directly into your bank account and can last up to two years from the start of your claim.
It can be claimed any time after starting income protection insurance up to a certain age.
The deferred period (pre-payment of income protection insurance) is the amount of time between when your income loss occurs and when income protection insurance starts to pay out. The longer the deferred period you select, the lower your monthly premium will be.
Is It Worth Getting Income Protection Insurance?
Income protection insurance provides financial security and peace of mind, knowing that income will be provided to you and your family should something happen. It is especially useful if you are self-employed and do not have access to income protection through your employer.
It is also worth considering income protection insurance if you have dependants who rely on your income to cover their needs, or if you have large outstanding debts that need to be paid off in the event of an income loss.
The Difference Between Income Protection Insurance and Statutory Sick Pay
Income protection insurance is different from Statutory Sick Pay (SSP) as income protection insurance provides income for longer than SSP, allows you to choose a level of income that suits your needs and can also be tailored towards your personal circumstances. This means it can provide income if you are self-employed or have been made redundant.
How Much Does Income Protection Insurance Cost UK?
The cost of income protection insurance can vary depending on a number of factors, such as the policyholder’s age, occupation and income level. Generally, premiums for income protection insurance are between 1% and 5% of pre-tax income.
The cost varies depending on your age, health conditions, deferred period (see above), whether you smoke or not, your occupation etc.
Income protection insurance policies are tax-free and can be taken out as either a standalone policy or part of an income protection plan.
You may not need income protection insurance if;
- You have income protection through your employer
- You are eligible for income support or other benefits
- Your income is below the minimum income threshold set by the income protection insurer.
- You retire earlier than you are meant to
- You think you can carry on on benefits
- Your benefits package covers your sick payment for longer than 12 months.
Conclusion
Income protection insurance can provide you with peace of mind in the event that you are unable to work due to illness, injury or other unforeseen circumstances. It pays out income benefits up to 65% of your income until you can return to work or retire. Income protection insurance can be tailored towards individual needs and is a worthwhile consideration if you have dependants who rely on your income or have large outstanding debts. The cost of income protection insurance varies depending on many factors, including age, health conditions, income level and deferred period. It is important to understand the terms of any income protection insurance policy before signing up for one, to ensure it meets your needs.
