Income Protection Insurance Explained

Income protection, is also known as permanent health insurance or wage replacement. It aims to provides a tax free income if the policy holder becomes unable to work through illness. The income is typically paid until retirement age, the end of the policy term or until the policy holder is able to return to work. Permanent health insurance does not normally cover unemployment or redundancy.

How do You Know How Much Cover to Have?

Most income protection policies will pay a monthly tax-free payment equivalent to between 50% and 65% of gross salary, although some companies will offer up to 75%.

Many company pension schemes include some form of permanent health insurance as part of their benefits package. You should check you benefits package before applying for an income protection plan as these can affect your maximum benefits allowed. If you are unsure please speak to one of our advisors.

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There is a period following the accident or illness which must elapse before the policy begins to pay. This is known as the deferment period before your can receive your benefit.

This period can range from a month up to two years with the deferment periods offered varying between providers, Currently the options are 4 weeks, 8 weeks, 13 weeks 26 weeks, 52 weeks and 104 weeks. Our advisors will also have access to plans with no deferment period known as back to day one income protection insurance.

How are the Premiums Calculated for an Income Protection?

Premiums are dependent on the monthly benefit required, age, current state of health smoker status and occupation. The deferment period also affects the premium, with a shorter period resulting in higher premiums being paid.

The premiums can be set on a guaranteed basis or a reviewable. With reviewable there are two types you need to be aware of, the traditional which is looked at every 5 years and than less common annual ones.

A traditional reviewable plan will have a definition similar to the details here;

Every five years we'll look at things like medical advances, changes in the law, changes in the insurance industry and our experience with claims to work out whether you're paying the right amount for your cover. We'll confirm whether your premiums need to go up, down or stay the same.

The annual plans can have a definition based on age and will have a definition similar to the details here;

Age-costed: the amount you pay each year will be based on your age. This means you pay less when you’re younger, and the amount you pay will normally go up each year as you get older.

If you are looking for life insurance its worth noting that income protection insurance can be taken with some providers as part of a life insurance multi benefit plan. The benefit of this is the potential to save on policy fees as some companies will offer a multi plan discount.

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Al thought Income from a plans is not typical taxed as earned income taxation levels and basis of relief's are dependent on current legislation. It is important to remember that it is down to individual circumstances is not guaranteed and may be subject to change.

What are the Different types of Income Protection Insurance?:

Long Term Cover

• pays a tax free monthly income on the event of you not being able to work due to accident or sickness. The monthly benefit is payable until you return to work or until the end of the policy term..

Short Budget Income Protection

• pays a tax free monthly income on the event of you not being able to work due to accident or sickness. This type of cover pays for a maximum 2 years claim period for further details please read our section on low cost income protection for further details

Mortgage Payment Protection

• pays an amount of monthly cover based on your mortgage payment if you lose your job or can't work, you get that amount of money each month. Policies usually pay out for up to a year or until you return to work. please read our section on mortgage protection.

Accident Sickness or Redundancy

• pays an amount of monthly cover bused on your income if you lose your job or can't work, you get that amount of money each month to spend how you like. Policies usually pay out for up to a year or until you return to work. please read our section on accident sickness and redundancy

Some providers of income protection cover offer benefits such as

• Increasing benefit
• Parent and child cover
• Rehab support services, Fracture cover
• Life Insurance Death benefit
• Unemployment payment holiday
• Benefit guarantee of £1500 pm
• Guaranteed Increase Options – Including one for those that rent

You can Buy Income Protection Insurance Plans on a

Single Life

• Pays an Income to one person on a claim

Joint life

• Plan can only be taken out as an single life plan as the policy is underwritten on your personal heath and occupation