There is a growing unease about the economic fallout of COVID-19. Many businesses are laying off contractors and putting staff on extended leave. There is also the natural worry about contracting the disease.
What this crisis has shown is being unable to work can turn our world upside down. No one likes to think something bad will happen to them. But if you could not work due to a serious illness, how would you manage financially? Could you survive on savings or sick pay from work?
If not, you may need some other way to keep paying the bills. Income protection insurance is an option to consider. It is important to recognise no one can guarantee they will not be the victim of an unfortunate accident or illness.
Cover monthly payments
Even if you were ill for only a short period, you could end up using your savings to pay the bills. How long would they last? You could even find that you are never able to return to work. Few of us could cope financially if we were off work for more than six months.
Income protection insurance is a long-term insurance policy. It provides a monthly tax-free payment if you can’t work because you’re ill or injured. The policy typically pays this until you can start working again, until you retire, die or the end of the policy term. Whichever is sooner.
Income protection insurance aims to put you back to the position you were in before you were unable to work. It does not allow you to make a profit out of your misfortune. So, the most amount of income you can replace is broadly the after-tax earnings you have lost, less an adjustment for state benefits you can claim. This is typically translated into a percentage of your salary before tax. The actual amount will depend on the company providing the cover.
If you are self-employed, then no work is also likely to mean no income. Depending on what you do, you may have income coming in from earlier work, even if you are ill for several months. Self-employed people can take out individual policies rather than business ones. However, you need to find out on what basis the insurer will pay out. A typical basis for payment is your pre-tax share of the gross profit, after deduction of trading expenses, in the 12 months before incapacity. Some policies operate an average over the last three years. This is because they understand that self-employed people often have a fluctuating income.
Cost of cover
The cost of your cover will depend on your occupation, age, state of health and whether you smoke. The ‘occupation class’ is used by insurers to decide whether a policyholder can return to work. If a policy will pay out only if a policyholder is unable to work in ‘any occupation’, it might not pay benefits for long if at all. The most comprehensive definitions are ‘Own Occupation’ or ‘Suited Occupation’. ‘Own Occupation’ means you can make a claim if you are unable to perform your own job.
When you take out cover, you usually have the choice of:
Level cover – with this cover, if you made a claim, the monthly income would be fixed at the start of your plan and does not change in the future. You should remember this means if inflation starts to rise, the buying power of your income may reduce over time
Inflation-linked cover – with this cover, if you made a claim, the monthly income would go up in line with the Retail Prices Index (RPI)
Guaranteed premiums – the premiums remain the same all the way throughout the term of your plan. If you have chosen inflation-linked cover, your premiums and cover will automatically go up each year in line with RPI
Reviewable premiums – this means the premiums you pay can increase or decrease in the future. The premiums will not typically increase or decrease for the first five years of your plan, but they may do so at any time after that. If your premiums do go up or down, they will not change again for the next 12 months
Making a claim
How long you must wait after making a claim will depend on the deferral period. You can typically choose from between 1, 2, 3, 6, 12 or 24 months. The longer the period you choose, the lower the premium for your cover will be. Premiums must be paid for the entire term of the plan, including the deferral period.
Depending on your circumstances, the payments from the plan may affect any state benefits due to you. This will depend on your individual situation and what state benefits you are claiming or intending to claim.