What is an income protection plan?
If you have a mortgage or decide to take out bridging finance, one thing you may be worried about as a borrower is running the risk of defaulting on repayments at some point in the future, meaning that you are concerned about the risk of ending up in a cycle of debt, or even worse, potentially losing your home completely. However, sometimes we can try to do whatever we can to keep fit and healthy, or keep our finances in check, and still end up in a financial emergency because of an unexpected illness. This is where an income protection plan can help you. But what exactly is this? We explain everything you need to know.
What is income protection insurance?
This used to be under another name, known as permanent health insurance (PHI) and it is a type of insurance protection policy that would be able to help you in the event that you find yourself unable to work for an extended period of time, due to injury or illness.
Otherwise known by its acronym IP, this is a protection plan that will pay out for a number of years (until retirement, death or until you return to work, depending on the individual circumstances). Nevertheless, it is also possible to get a short-term IP policy (also known as Stips) if you are looking for a similar policy with lower overall costs.
However, it is worth noting that these types of policies do not pay out if you end up becoming redundant, but you may be able to provide you with some form of back to work support if you are off due to illness.
Why should I get an income protection plan?
According to the consumer body Which? whilst many of us do not currently have an income protection policy in place ( in fact, it is estimated that less than 9& of people in the country have this type of insurance, compared to 16% who have bought private medical insurance, and 41% who have taken out life insurance), it is nevertheless something that each and every working adult in the UK should consider. But why?
There aren’t many employers in the UK who will cover their staff in the event that they need to take off a year or more due to becoming ill. With so many bills that will continue to be needed to be paid for, such as mortgages, this can be an extremely heavy burden on not only the person in question who is ill, but also supporting family members who may need to take on additional work in order to cover the costs of their partner or close family member being out of work. Clearly, this can put an enormous amount of stress on all concerned.
Furthermore, there is a low level amount of support available when it comes to state benefits, meaning that you will not necessarily be covered for the full amount you need in order to sustain your previous lifestyle, as statutory sick pay rates currently in the UK are up to £92.05 a week for up to 28 weeks.
How much does income protection pay out?
If you decide to get an income protection plan policy and need to use it, then you can expect to receive anywhere from 50% to 70% of your normal earnings. These payments are made to you on a tax-free basis.
It is worth remembering that these types of policies will only pay out in the event that the pre-agreed period has passed at the point at which you make a claim. This exact time frame will be dependent on the IP provider in question, but it can be from just one month, up to twelve altogether. To cut down on costs of taking out this type of insurance policy, take note of the fact that if you choose a deferral period with a longer time frame, the lower your overall premiums will be.
How much does IP cost?
There will be different factors at stake when it comes to the exact amount that you will end up paying (for example as similar with other kinds of health insurance policies, IP providers will be looking at things such whether your smoke, if you are in good health or not, as well as the level of cover that is required). However, it is worth noting that the type of job you have also plays a role, with a number of IP insurers dividing people into four categories as listed below:
- Class 1: Professional: managers, computer programmers, secretary
- Class 2: Those considered to have the high business mileage or skilled manual work
- Class 3: skilled manual works or semi-skilled workers: plumber, teacher
- Class 4: those that fall into the heavy manual worker or unskilled worker category