Income protection insurance – choosing a policy
If you become too ill to work and have the right income protection insurance policy you will receive an income until the policy expires. Picking the right cover means matching your needs and personal circumstances to the best policy available. You might need to get professional advice from a financial adviser to help you decide.
Income protection policy features
Income protection policies might seem complicated, but it’s important to understand what you’re signing up to. In this guide we’ve highlighted the main parts for you to look out for.
Level of cover
Income protection insurance replaces part of your income if you become unable to work because you’re ill or injured. You can choose from three main levels of cover, which pay out based on your situation:
- Own occupation: you can’t do your own occupation.
- Suited occupation: you can’t do your own job or a similar one that suits your qualifications and experience.
- Any occupation: you’re too ill to do any kind of work.
For example, if you were a surveyor and needed to physically inspect various properties, any condition that stopped you walking would be eligible for a claim under an ‘own occupation’ plan.
But, under an ‘any occupation’ plan, the insurer wouldn’t pay out, because you’d still be able to do some types of work.
In most cases, ‘own occupation’ cover will be the most expensive and ‘any occupation’ cover the cheapest.
Most complaints about income protection insurance are about whether or not a consumer meets the definition in their policy.
An ‘own occupation’ definition – when the policy pays out if you’re unable to do your own job – makes it more likely that you’ll make a successful claim.
Length of pay out
Your policy will only pay out up to a maximum stated limit.
The maximum length of time will be to the expiry date of the policy, usually set to tie in with your retirement date, the day your children finish full time education, or the length of your mortgage.
There are also policies that pay out for a fixed period such as five years and these will be less expensive.
If, following a claim you return to work, but then shortly afterwards fall ill with the same complaint, the insurer will regard this as a continuation of the first claim and pay benefit straight away.
You can claim many times under the same policy if you’re off work repeatedly due to ill health.
Amount of pay out
You can choose a policy which pays out a set amount to cover particular bills and outgoings, or you can cover a percentage of your income.
If when you claim you’re still receiving an income, for example through your employer’s sick pay scheme, the amount of benefit will be reduced.
Hospitalisation benefit is a cash payment available under some policies for each night that you spend in hospital, typically after the first seven days.
What do I need to think about before buying income protection insurance?
Factors that influence the cost
- The amount you want to cover
- How long you want to be covered (the term)
- Whether you smoke or have previously smoked
- Job – the more manual or specialist the higher the cost
- Health (your current health, your weight, your family medical history)
- The definition of disability – own occupation, suited occupation or any occupation (see above)
- The excess waiting period before you’re paid (deferred period) (see When does it pay out? below)
When does it pay out?
The amount of time you’re off sick before your policy pays out is called the ‘deferred period’ (also known as the excess or waiting period).
You might decide that, if you can’t work, you wouldn’t need payments until:
- Your savings run out
- Your statutory sick pay runs out (six months)
- Your employer’s sick pay runs out (varies between companies and is not always offered, but could be up to twelve months)
So, if you have six months’ worth of sick pay and another six months’ worth of savings, you might defer your claim for a year.
The longer your waiting period, the cheaper the premium will be. The most common waiting periods are 4, 13, 26 weeks and a year.
Choosing between guaranteed premiums (monthly payments) and reviewable premiums
Some income protection policies give you the choice of a fixed, or guaranteed premium.
This means that you’ll always pay the same sum every month during the policy.
While this can cost slightly more in the short-term, many people like the security of knowing what they’ll be paying in future.
Alternatively you might think about premiums that can be reviewed from time to time – where rates are typically reconsidered every five years.
The initial cost tends to be lower, but can rise over time and is influenced by:
- Your age
- Medical advances
Claims support services
Some policies provide claims support services to give help and support, such as helplines and information about your medical condition.
In the event of a claim they can help you make a speedy recovery and return to work as soon as possible.
It’s useful to get expert advice. Advisers can take you through the details of the various policies available and make sure you pick the right one.
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