Income Protection

In contrast with critical illness cover, income protection provides a regular income for a fixed period if you are unable to work due to an accident, illness, or redundancy.
Research suggests that only around 10% of the working population has income protection insurance – a device that guarantees an alternative source of regular income in the event that pay from normal working is temporarily interrupted or lost. Of the remaining 90%, most have a misplaced and exaggerated notion of where an alternative income might come from.
Some might think their savings adequate to tide them over any period spent without pay from work. Average savings, however, are currently at an all-time low and are unlikely to last for any significant duration. Some employers might offer a reasonable sick-pay scheme for those temporarily incapacitated for work, but even these payments will be withdrawn if the absence is longer than three to six months and no pay at all will be available in the event of redundancy.

If you lost your income due to illness, could you and you partner or spouse live off one wage?

If you are single – how long could you survive on your savings or on state benefits?
How long would your employer pay your full wage, or even a percentage if you were on long-term sick leave?
If you were in hospital for any length of time, how would you pay your mortgage or rent?

Here are a few examples and reasons for claims on income protection policies having been made although it isn’t always easy to recognize when Income protection may be needed and will often depend on the kind of work you do and the effect an illness or injury may have on your work, and your doctors opinion on your ability to work:
Cancer, Stress & Depression, Head Injury Following Road Traffic Accident, Chronic Fatigue, Multiple Sclerosis, High Blood Pressure, Heart Disease, Fractured leg, Fractured arm, back pain.

The amount you pay for an income protection policy will usually be influenced by the type of job that you do. The higher the risk of injury or stress the more the premium will be. There are usually 4 categories of classification.
These are a few job titles with their likely classification however different insurers may categorise the same jobs differently.

Class 1: Managers, Administrative staff, Professionals, Secretary, Computer Programmer.
Class 2: Engineer, Shop Assistant, Florist, Driving with mileage exceeding 20,000 miles per year.
Class 3: Plumber, Teacher, Care Worker.
Class 4: Mechanic, Bar worker, Construction. Roofer.

There are generally two forms of income protection:

1/ Accident, Sickness and Unemployment.(ASU) – This is usually a policy which pays a benefit for a short period of time such and 1 or 2 years. There is usually an exclusion period from inception and one can choose whether you want both accident and sickness as well as unemployment combined or whether you want accident and sickness only or unemployment only. During a recession, it is often difficult to get Unemployment cover unless you are changing or taking out a new mortgage.

2/ Permanent Health Insurance (PHI) – This is usually a policy which pays a benefit for a longer period of time, normally until the end of a selected term at outset or until you return to work or until you retire or die. PHI is usually underwritten more strictly than Life Insurance because of the greater of being ill than of dying and also the different types of policy are far ranging and care needs to be taken that you understand the differing benefits between differing policies and providers. For example some Insurers will cover only 50% of the last 12 months earnings whereas others may cover 66%. Changing job categories may cause a premium increase or in certain instances a decline of further cover even where guaranteed premiums have been taken at outset.

Understanding the cover that you require and cover you may have is important and reviewing what you have is often as important as deciding to take out cover for the first time.

Typical Permanent Health Insurance monthly costs for Long Term Income Protection against Accident, Illness or Disability based on Class 1.

Benefit Payment £500/mth – deferred 3 months – to age 65.

- Reviewable Rates – No premium increase for smokers or occupation – premium increases with age.
- Guaranteed Rates – Premium dependant on occupation and smoker status.

Male age 20:  -    £8.40 Guaranteed Rate       £7.00 Reviewable Rate
Male age 30:  -  £11.00 Guaranteed Rate       £7.00 Reviewable Rate
Male age 40:  -  £16.50 Guaranteed Rate       £9.24 Reviewable Rate
Male age 50:  -  £23.75 Guaranteed Rate     £16.00 Reviewable Rate

The state provides Statutory Sick Pay and Employment and Support Allowance, but is this enough?
Have a think about how much your monthly outgoings come to and then see how much the state would give you. You might find there is quite a shortfall. How would you bridge the gap?

The State may help a little… This is what may get each week.

Statutory Sick Pay
from 1-28 weeks:                                                                               £79.15

Or
Employment & Support Allowance
(assessment phase)from 1-3 weeks                                       upto     £64.30

Or
Employment & Support Allowance
(main phase – work related activity group)
from week 14                                                                       upto      £89.80

Or
Employment & Support Allowance
(main phase – support group)
from week 14                                                                      upto         £95.15

Your home may be repossessed if you do not keep up the repayments on your mortgage or any loan secured upon it.
Veracity financial planning is not responsible for, nor does the Financial Services Authority regulate advice given with regard to taxation matters regard to trusts; some aspects of tax advice; commercial mortgages or second charge secured lending.