Income Protection, often referred to as I.P, also known as sick pay cover, is an insurance policy designed to provide financial support by paying a monthly amount if you are unable to work due to an accident, illness, or injury. Its primary purpose is to replace a significant portion of your income, ensuring you can meet your essential monthly expenses such as mortgage/rent, council tax, food, and utilities.
One key distinction between Income Protection and Critical Illness Cover is that Critical Illness Cover offers a lump sum payment upon the diagnosis of a specified illness. In contrast, Income Protection does not rely on a predetermined list of conditions but rather on your ability to continue working. It considers various definitions such as own occupation, suited occupation, and any occupation. To determine the most favourable definition for your job, it is advisable to consult with a specialist who can help you select the right policy.
Income Protection policies are typically structured to cover you until your intended retirement age, usually up to a maximum of 70-75 years depending on the insurance provider. These policies also have a “deferred period,” which refers to the waiting period before you can make a claim. The deferred period can range from 1 week to 1 year.
It’s worth noting that policies with longer deferred periods tend to be more affordable. However, a commonly chosen period is between 1-3 months, taking into account a person’s savings or the duration of their employer’s sick pay provision.
Most insurers offer a maximum cover amount of approximately 60% of a person’s gross (pre-tax) income. For self-employed individuals and business owners, this coverage may also include dividends and P11d benefits in most cases.
Income Protection offers three main types of coverage to cater to different needs:
1. Full Term Cover:
Full Term Cover provides comprehensive protection by offering payouts from the end of your waiting period (e.g., 8 weeks) until the end of your policy (e.g., Age 68). It ensures that even if you recover and return to work, you can make a claim again if you experience a further illness or a recurrence of a previous illness. This type of cover typically comes with a “guaranteed” premium, meaning that once you have been accepted and the cover is active, the premium remains fixed throughout the policy term, securing it for the duration of your working lifetime. However, it is often advisable to index-link or inflation-link the policy to maintain its value over time, particularly in light of the current inflation climate.
2. Budget Cover:
Budget Cover is designed for individuals who cannot afford full coverage. It limits the duration of any claim to a shorter term, typically between 1-2 years (although some policies may offer up to 5 years per claim). The purpose of this type of cover is to provide short-term income support during challenging periods.
3. Personal Sick Pay Cover:
Personal Sick Pay Cover is popular among tradespeople or individuals engaged in manual work as a significant part of their daily activities. It is often a more affordable option than full term cover because the premiums increase as the insured person gets older (a process known as “agerating”). This type of cover is commonly chosen when someone working in a manual role plans to transition to a more managerial position in the future. Depending on the application, they can switch to a fixed-rate policy when their job role changes.
It’s important to consider these different types of Income Protection coverage and choose the one that best aligns with your specific circumstances and financial requirements. Consulting with an insurance specialist can provide valuable guidance in selecting the most suitable policy for your needs.