Income Protection made simple
Income Protection is a protection product overlooked by most. It is common to consider Life insurance and Critical illness cover. But what happens if you are unable to work due to accident? Or illnesses not covered by a critical illness plan, or your employer? The solution is a contract that covers your monthly income while you spend time recouping.
There are many different types of Income Protection and it is vital that the correct type of cover is chosen for your occupation. Factors such as incapacity definitions, deferred periods and the payment period can influence when a successful claim can be made.
Here IEP Financial dives into the world of Income Protection to provide a simple summary of what can be a complex product which covers a percentage of your yearly income.
Within Income Protection products three main incapacity definitions are considered. Own Occupation, Suited Occupation and Any Occupation.
By far the most comprehensive of the three definitions; this type of Income Protection insurance covers you within your own occupation. Meaning that if there is a medical reason as to why you cannot do your own occupation then the insurance pays out. This type of cover eliminates any discussion with the insurer at claim stage beyond whether or not you are too ill to work. There is no discussion around whether you could possibly do any other job or work at your current role with limited abilities.
We highly recommend this definition of cover as it is by far the most transparent variant and means you know exactly where you stand at the outset- eliminating any surprises at claim stage.
There are certain occupations that cannot obtain this definition of incapacity, speak to one of our advisers who can determine the best way to obtain cover for your specific job role.
A less comprehensive variant compared with Own Occupation. Here the insurer will determine at claim stage whether there may be any other suitable occupations where you could perform the tasks required with your medical condition. Our experts agree that this definition is too vague and leaves the door too wide open. Who is to say what you may be suited to? This is a slightly subjective way of determining claims and is therefore not recommended.
The least comprehensive definition under Income Protection insurance; our experts emphasise the need to be wary here. The insurer will determine whether you are able to do any other occupation and if they deem this possible will not pay your claim. This does not mean that the insurer has to find another role that’s available, all they must state is that you could potentially do another role which is enough to not pay a claim.
The deferred period is the length of time that you can wait while out of work before the payments from the insurer begin. This is a factor that can be lengthened or shortened in order to tweak the cost of the cover. The longer you are able to wait before the insurance kicks in- the lower your premiums will be.
Typically deferred periods range from 1 day to 12 months. This needs to be aligned with any sick pay from an employer you may receive. You cannot be in receipt of sick pay and payments from Income Protection insurance simultaneously.
The real sweet spot is where you are able to wait 3 months before the cover starts paying out; it’s at this point that prices become very competitive!
Short term vs Long term payments
There are two main options to choose from with Income Protection when it comes to the payment period.
Short term cover will pay for either 12, 24 or 60 months depending on what is determined at outset while long term cover will pay until you are able to return to work. Even if this means you are never able to return to work again. The cover will continue to pay until the expiry date (usually set at retirement age).
The longer the potential payment period the more expensive the cover becomes, this is why it is important to consider how much you are able to spend on this type of insurance as some cover is better than no cover therefore if the full term more comprehensive plans are too expensive to consider any of the above factors can be tweaked slightly to suit your budget.
Tax efficient Income Protection
Some types of Income Protection cover can work out to be very tax efficient. The monthly premiums can be run through the business and treated as a business expense. Therefore, reducing your corporation tax bill at the end of the year. This form of cover is called Executive Income Protection and is most suitable for directors of limited companies.
It is important to align this plan with what you are drawing from the company rather than your total profits so please get in touch with one of our advisers who can assist and answer any questions you may have.
One of our Independent Financial Advisors can assist in determining the correct level of cover for you.
IEP Financial is authorised and regulated by The Financial Conduct Authority (FCA)
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Income Protection made simple was originally published on 25/09/2017
The value of investments can fall as well as rise and past performance is not a guide to the future. The content of this publication is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial Advisor.