Income Protection

1 What Is Income Protection?

Income Protection (often referred to as “Permanent Health Insurance” or PHI in older documents) is a type of insurance that pays out a regular income if you cannot work due to injury or illness. Generally:

• It covers a set percentage of your salary (up to a certain maximum).
• Payments continue until you either return to work, reach a specified policy age (often retirement), or the policy ends.
• You can tailor the policy to reflect your financial situation, whether you are employed or self-employed.

Key Aim

The primary aim is to ensure you still receive an income to cover essentials - like rent or mortgage payments, household bills, and daily living costs - even if you’re off work for months or years due to health issues.

2 Why Is Income Protection Important?

2.1. Financial Security for You and Your Family Losing your monthly pay cheque can be daunting. Although you might receive Statutory Sick Pay (SSP) from your employer or benefits from the state, these are often insufficient to maintain your usual lifestyle, especially if your time away from work extends for several months. Income Protection can bridge that gap and provide a sense of financial stability.

2.2. Protection Where Other Policies Fall Short

• Life Insurance pays out a lump sum in the event of death.
• Critical Illness Cover pays out a lump sum if you’re diagnosed with a specific illness.

However, neither of these offers sustained monthly income if you’re unable to work for a broader range of conditions. Income Protection addresses this gap by offering ongoing financial support during prolonged periods of incapacity.

2.3. Safeguarding the Self-Employed If you’re self-employed, you won’t have an employer to lean on for sick pay. As a result, Income Protection can be particularly useful. With no guaranteed employer sick pay, this type of policy can provide a safety net when you can’t run your business or generate revenue.

3 Types of Income Protection Policies

There are various forms of Income Protection, and choosing the right one depends on factors like your job type, risk tolerance, and budget. The main distinctions include:

3.1. Short-Term Income Protection

Short-term policies typically pay out for a limited period - often 1, 2, or 5 years - after which benefits stop. Premiums can be lower, but you have less coverage if your incapacity extends beyond the policy’s payout period.

3.2. Long-Term Income Protection

Long-term policies can continue paying benefits until you reach retirement age or are able to return to work, whichever comes first. These policies usually have higher premiums but offer more comprehensive protection over the long haul.

3.3. Deferred Period Options

The “deferred period” (or waiting period) is the length of time you must be off work before your policy begins paying out. Common options include 4 weeks, 8 weeks, 13 weeks, 26 weeks, or 52 weeks. A longer deferred period often reduces premium costs because the insurer pays out later. For instance, if you have good employer sick pay for 6 months, you might set your policy’s deferred period to start after that.

3.4. Level vs. Increasing Cover

• Level Cover: The monthly benefit you would receive remains the same throughout the policy.
• Increasing Cover (index-linked): The monthly benefit grows in line with inflation each year, helping you keep pace with rising costs of living.

4 How Income Protection Works in Practice

1. Choose Your Cover

You begin by determining how much of your income you wish to protect - most policies allow cover of up to around 50 - 70% of your gross salary. You’ll also select your deferred period, policy term (how long you want coverage), and any additional features (e.g., inflation-linked increases).

2. Pay Monthly Premiums

The cost of premiums depends on factors like your age, health, occupation, smoking habits, deferred period, and type of cover (short-term or long-term). Premiums might be:

• Guaranteed: Staying the same throughout the policy unless you make changes.
• Reviewable: Periodically adjusted by the insurer, often based on external factors like changes in claims statistics or economic conditions.

3. Make a Claim

If you fall ill or suffer an injury preventing you from working, you’ll typically provide medical evidence to the insurer. Once your deferred period has elapsed, and the claim is approved, you’ll start receiving monthly payments. These payments continue until you can return to work or reach the policy’s end point (often a chosen retirement age, e.g., 65 or 68).

4. Return to Work and Rehabilitation Support

Many insurers also offer rehabilitation support and partial benefits - where you might receive a reduced payout if you can only return to work part-time initially. This feature can ease the transition back to full-time employment.

5 Cost Considerations

While Income Protection can be indispensable, the premiums vary widely based on:

• Age: Older applicants generally face higher premiums.
• Occupation Risk: Jobs that involve manual labour or hazardous conditions tend to come with higher costs, as the risk of illness or injury may be greater.
• Health Status: Existing medical conditions, family medical history, and lifestyle (e.g., smoking or high BMI) can affect premiums.
• Deferred Period: A longer deferred period usually means lower premiums.

To strike a balance between affordability and comprehensive cover, you might:

• Opt for a longer deferred period if you have sufficient sick pay or savings.
• Consider short-term Income Protection if you anticipate needing only a limited window of cover due to alternative financial arrangements or a robust emergency fund.
• Assess whether you need index-linked cover - especially if you expect living costs to rise steadily over time.