Income protection is an insurance product which pays you a monthly benefit each month if you are unable to work due to becoming too ill to work or if you have an accident which prevents you from working. Very important for those self-employed people and employed people who only receive statutory sick pay.
If your income stops the bills do not…
Some quite alarming stats for you
According to LV Liverpool Victoria’s research in 2018 just 44% of people in the UK have three months of their outgoings in savings. Meaning that after three months they will be unable to pay their bills if their income stops.
10.8 million households would be entitled to little or no state support if the breadwinner had to stop working due to an accident or illness.
Source: Centre for economic and social inclusion CESI 2018
In 2018 income protection policies paid out over 600 million and claims
source: Association of British insurers
A 30-year-old male who doesn’t smoke has a 29% chance of being off work for two months or more and a 35-year-old female who doesn’t smoke has a 41% chance of being off work for two months or more.
Source: results from LV risk to reality based on a retirement age of 65
1:5 people in their early 30s don’t know how long they will be able to cope financially if they found themselves unable to worksource: research carried out by yougov off on behalf of LV in June 2018
A couple both aged 30 have a 60% chance of one of them being unable to work for two months or more before they retire. Results based on a non-smoking male and female couple both retiring at age 65 as calculated by the LV risk to reality calculator
As I’m sure you can agree some of these stats are quite alarming and scary therefore it highlights the importance of income protection. As a financial advisor, in my opinion anybody self-employed should insure themselves with this type of cover unless you have a lot of easy accessible money in the bank. Anybody who is employed only receiving statutory sick pay also needs this type of insurance to cover their bills.
Income Protection typically has a deferred period, the deferred period is the length of time before the benefit starts for example if you had a seven day deferred period the policy would start to pay you your monthly benefit after the seventh day. You can choose from various deferred periods: first day or week, third, sixth or twelfth month. When choosing you should consider things like the amount of savings you currently have, when your last pay day will be or are you entitled to full pay from your employer.
There are various benefit periods for income protection, this means how long the insurance companies will continue to pay whilst you are off work due to an accident or sickness. Some companies offer short-term benefit periods for one to two years which are cheaper than the longer-term options. Some companies will offer a long-term period with a five year benefit phase and some will even pay you right up until your retirement age. The policies which pay you up until retirement age are understandably more expensive than the short-term benefit periods. When looking into an income protection you need to consider this to suit your situation
Other important points
When looking into income protection I recommend you speak to a broker as there are hundreds of companies who offer this service with many different options and variations to the cover. My experienced brokers at Bespoke Financial Newcastle ltd can offer reliable information and advice, their details are listed at the end of this document as there are many brokers out there who have little or no experience and can potentially give incorrect advice.
Factors that affect your insurance premium each month
If you have a low risk job in terms of what the insurance company classes as a low risk job, you may find that your monthly premium is cheaper with some companies than others.
Your current health status and previous health history
If you have had previous health issues or conditions insurance companies will sometimes want to look closely into this by writing to your doctor to check out the condition or to clarify any of their concerns. If you have had re-occurring health issues it is very possible that the insurance company may exclude these from future claims. If you have a current or ongoing health issue at the time of applying for income protection the insurance company could even postpone starting the cover, as they would want this issue to be resolved before insuring you.
You’re smoking status and age
If you are a smoker typically you will pay more for your insurance than a non-smoker as the insurance companies class this as a higher risk. If you are aged under 30, some companies do not class you as high risk even if you are a smoker and for that reason it is important to go to a broker who understands and knows the underwriting rules of each company. Your age also matters when it comes to your monthly premium, the older you are the more expensive the policy will be. Some policies will increase the price each year on your birthday or anniversary of the policy and some policies are fixed for life.
Claiming under income protection can be simple but can also be drawn out depending on how you look at it and who you ask, for example at point of claim you will need to prove your earnings in most cases. Whether that be through producing payslips/p60s if you’re employed or if self-employed tax returns limited company accounts and various other documentation will need to be produced depending upon the insurer you are using. You typically request a claim form from your insurer and then take that to your GP’s or who you were seen by in hospital to complete the form and return to the insurance company. Once this is completed the companies underwriting department will assess your claim and normally be in touch via email phone or letter. If you are self-employed and your income fluctuates then you may want to consider an insurance company that does not request proof of earnings at the point of claim some insurers just ask you to prove a certain amount of hours you work per week but again this varies. Yet another reason why you should use a trusted broker to get you the most appropriate product.
RPI and indexed linked policies
I personally would recommend that you link your policy to RPI or index linked. This basically means that your policy premium will go up normally 1-3% each year along with your monthly benefit. So, for example if your monthly benefit is £1000 per month and you pay £30 per month and your policy is index linked at 3% then your monthly benefit will go up 3% to £ 1030 and your monthly premium will also go up 3% To £30.90
If you do have any hobbies like playing sport or a hobby that the insurance company classes as dangerous; skydiving, scuba-diving, MMA, boxing and motocross etc. Then you should always disclose these to your broker. The reason for this is that the insurance company may decline a claim for one of the sports or they may bring in an exclusion for one of the sports. Again, another reason why it is important to use a broker as they can place you with a company who may be able to cover these
This free report was based on my industry knowledge over the last 10 years. I am very passionate about what I do and I love helping families arrange the correct protection. These are my own views, based on correct information. Please be aware when reading the information above there may be changes or differing information on what I have discussed. If you are looking to take a policy out please get in touch with me or a member of the team at Bespoke Financial Newcastle on the numbers below and we can explain in detail all relevant information, T&C’s and product details so you can make an informed decision to go ahead
Just to point out income protection will not pay you if you get full pay from your employer. It does however, pay you the monthly benefit if you are self-employed and if you only receive statutory sick pay. Currently in March 2020 statutory sick pay in the UK is £94 per week and I’m sure you can agree that for most this will not even cover monthly house bills. So, for this reason income protection is essential for anybody self-employed and for anybody who only receives statutory sick pay. At the end of the day if you are unable to work due to being too ill or as a result of an accident your income will stop and unfortunately the bills do not. Your mortgage payments, gas & electric, phone bills, car payments and insurance policies all continue to take money out of your account every month. Understandably for a lot of people this is a huge problem and it is not easily solved apart from having a huge amount of savings or setting up an insurance policy to cover yourself and the family. Although everyone’s situation is different, you must consider your own whilst looking for a policy to best suit you. There is a strong chance that it will be more cost-effective and less risky to set up a policy instead of relying on your savings. If you’ve saved up over a long period of time to have a safety net in the bank and then become ill with no fault of your own. Imagine having to use this money as part of your daily living expenses rather than being able to use it on a holiday for the year or to decorate the house etc.
So why not leave this common problem many people have on a daily basis, up to the insurance company who you pay a small monthly fee to, to cover all of the above if something is to happen.
It is always worth looking into the T&Cs of the policy as each insurer has different exclusions and quirks so speak to myself or one of my advisors to offer you in depth, trustworthy information to allow you to make an informed choice for yours and your families futures.
Our office number is 0191 580 7177
Our website is www.bespokefinancialnewcastle.co.uk
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I hope you enjoyed this free guide on income protection please watch out for future guides on other services we offer that may help you. I hope you and your family stay safe.