As an example, if you are unable to work for 30 consecutive days or more (bear in mind some policies have a deferred period of six or 12 months) you should be entitled to make a claim. When you take out the policy you will able to choose the length of time you wish to be covered for (one year, two years and so on) but it goes without saying that the longer you wish to be covered for, the more expensive your premium will be. Generally, most policies are continuous. Payments continue until you decide you no longer require cover.
The vast majority of income protection policies will only cover 75% of your income - and in some cases 50%.
Premiums depend on age, sex, job, hobbies, term of contract, indexation and level of benefits required - which will be a percentage of salary. It is important to think about what other occupation you might consider in the event of disability as benefits will cease once the policyholder is able to return to paid employment. It is essential that you carefully consider such options as “own or similar occupation” rather than “any occupation” as under the latter, a brain surgeon could find himself working as a shelf stacker or car valet rather than getting a payout. Full underwriting is needed and exclusions or rejection are possible, and a full medical by an independent practitioner may be required.
The advantage of income protection speaks for itself - you have the peace of mind that if you were to fall ill, suffer an accident or be made unemployed, you would still have an income and any debt repayments would be covered. State assistance is limited, and this can leave you open to huge problems if the unexpected happens.
Government statistics showed that 755,000 people were made redundant in the UK from June 2002-May 2003. That works out at more than 3,000 every working day. On top of that we are relying more on credit, with more than £1bn outstanding on mortgages, loans and credit cards at the end of July 2004 and the Citizen's Advice Bureau showing that the average household has debts of £10,700 - excluding mortgages.
With these statistics it's easy to understand the importance of covering your debts, especially as about half of the UK population has £600 or less in savings. Income protection can give you peace of mind.
On the downside, the main negative point associated with income protection is how much it costs. Make sure you always read the small print. Always check and double check that you're not paying for anything you don't want.
Consequently, it is best to shop around for the best income protection deal independently. Take a full overview of the market.
Before you buy a policy, be sure to consider the following:
- Terms and conditions - Make sure you qualify for cover against the policy's terms and conditions. Are you within their age bracket (usually 18-65)? Are you working 16hrs/week in full-time employment and usually have you been employed for six months or more? Do you live and work in the UK? If the answer to all these questions is "yes", then you are likely to qualify, but always check as policies vary.
- Non-permanent contracts - Some insurers will accept you if you have been working for more than 12months, but be sure to check.
- Redundancy and misconduct - Bear in mind you are not likely to be covered if you are fired from your job due to your own misdemeanour. Consequently, before buying a policy, consider your company’s redundancy package - it might be substantial enough that you don't need cover.
- Self-employed - You must inform HM Revenue & Customs if you cease trading. Some, but not all policies will cover you if you are forced to dissolve your business, but not if you do so on a voluntary basis.
- Sick pay - Will your company pay you during a long-term illness? If so you could limit your cover to exclude sickness, therefore cutting your premium.
- Money in the bank - Do you have enough to cover you in the event of a long-term absence from work? If so, why get cover?
- Other insurance - Some other insurance policies, including health insurance, might cover a proportion of your salary rendering further cover unnecessary.
- Pre-existing conditions - A number of policies will not offer cover if you already have a health issue. Be sure to check the terms and conditions and if in doubt, ask.
- Age factor - Most policies will insure anyone aged 18-65, however, there are specialist policies available for the under 50s. If you are under 50 you are deemed less likely to make a claim and consequently your premium should be cheaper.
- Payment period - Most policies will only pay out for 12 months but this can vary.
- Payment excess - Some companies will offer you an "excess" that will cut your premium. This means that they will not pay out for a set period - perhaps 30 or 60 days. The longer the excess, the less you pay on a premium, but consider how long you can afford to go without debts being repaid on your behalf. There are many good policies available that will pay out from the time your problem begins.
- Will they pay an enhanced rate - Interest rates on a loan or credit card can fluctuate. Make sure your insurer will cover any potential rise.
- Introductory periods - Some insurers will not pay out for the length of an introductory period, which can be as much as three months.
- Unemployment restrictions - Is there anything that could stop you from making a claim if you were to lose your job? For example, is unemployment a regular occurrence in your chosen profession or do you have a seasonal job?
- Pregnancy/childbirth - Generally, you will not be able to make a claim in these circumstances.
- Short-term employment - Some insurers might suspend payments if you are able to get short-term work and restart them once this period ends. Not every insurer will do this.
Above all else, as with any form of insurance, thoroughly read the terms and conditions of your income protection policy. Make sure there are no loopholes and that you will not be short-changed in the event of a claim.
Source: Moneysupermarket
