Income protection insurance is designed to replace your monthly income if you are unable to work through sickness or accidental injury. Whilst this type of insurance is a valuable investment for all employees, people are often put off by the industry jargon and the wide choice on the market. Here, we have compiled 5 easy steps to guide you through the process of buying an income protection policy.
1) Decide how long you want your policy to pay out
Before you start to look for income protection, you need to clarify how long you want your policy to pay out for if you are unable to work- this is called the 'benefit term'. There are two main types of income protection, short term policies and long term policies.
Long term income protection allows you to choose your benefit term, but most policies will pay out until retirement age. For example, if you protected your income until the age of 65 and became ill at 45, your policy would pay out until you either returned to work or you reached retirement age at 65. However, short term policies will only pay out for a maximum of 12 months even if you are unable to return to work after this time.
Someone who has been off sick for 6 months or longer has an 80% chance of being off work for 5 years. Long term policies give a much greater level of protection, but may have higher premiums.
2) Decide what you want to protect
Typically, income protection is designed to protect your income by paying you a tax-free monthly benefit. This money can be used however you deem appropriate. Most people use it to cover their essential monthly outgoings such as their mortgage, rent, bills, council tax and food. Others use it to maintain their lifestyle, by meeting the cost of gym membership, holidays or school fees. Income protection will generally pay up to a maximum percentage of your earnings, often 50 or 60 per cent.
Income protection insurance can also be linked to a specific debt, such as your mortgage or your loan repayments. These policies are usually short term and will only pay out for a maximum of 12 months. Mortgage Payment Protection Insurance (MPPI) will meet your mortgage repayments, whilst Payment Protection Insurance (PPI) will meet the cost of your loan or credit card repayments.
Policies that are linked to a specific debt are often more expensive than policies that replace your income.
3) What do you want to protect against?
Income protection is designed to replace part of your monthly income if you should be unable to work through accidental injury or illness. If you feel secure in your job and are not worried about redundancy, then this level of cover will be ideal for you- it will only pay out if you were to suffer an accident or sickness which left you unable to work.
However, most short term policies will include cover for redundancy as well as accident and sickness. Long term policies do not usually include cover for redundancy, but it can be added as a bolt-on for a higher premium.
Excluding unemployment insurance from your policy will make the monthly premiums cheaper.
4) How long can you survive on your savings?
The deferred period is the length of time after making a claim that your policy will begin to pay out. Policies usually offer deferred periods of 4, 13, 26 or 52 weeks, and you can choose your deferred period depending on your individual circumstances. Before buying an income protection policy, check with your employer about your sick pay- by law, an employer must pay statutory sick pay for up to 28 weeks- and work out how long you can survive on your savings or your partner's income before you start to receive your monthly benefit.
The longer the deferred period, the lower the cost of the policy will be. If you are looking to reduce the cost of your income protection, choose a longer deferred period.
5) Compare the market
Once you have decided what you want to be covered for, it is time to compare the whole market to find suitable income protection quotes. Whilst you could contact each insurer individually, it can be more beneficial to use a comparison website to view the whole market in a few easy steps.
However, income protection insurance varies widely depending on your individual circumstances. Your occupation, your medical history, your family history and your smoker status will all affect what type of policy you are eligible for and the price.
By comparing the whole market, you will be sure that you get the best level of cover at the right price.
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