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Income protection How IP works

hospital bedIncome protection will cover you if you are unable to work due to accident or  illness

Millions of us have policies like critical illness, private medical insurance  and payment protection, sold to us over the years by salespeople who convinced  us we needed protecting. However, whilst they were right about the protection,  they were wrong about the policies.

The one protection policy every working adult in the UK does need is the very  one most of us don’t have – income protection (IP).

What is IP?

IP is an insurance policy which provides you with a regular tax-free income (In Ireland the benefit is subject to income tax, but the premiums attract tax relief) if you can’t work because of illness or disability. The benefit paid is up to a  maximum percentage of your earnings – often 50% or 60%. (Note that in Ireland the maximum benefit is 75% of earnings, less Social Welfare. )

Policies pay out after you have been off work for a period of time known as  the ‘deferred period’, and will continue to pay out until you can get back to  work or until the end of the policy term – usually retirement.

You can choose a deferred period of four, 13, 26 or 52 weeks, (In Ireland some companies are offering shorter deferred periods) depending on  how long you may be able to survive on any savings or how long you receive sick  pay from your employer.

The longer the deferred period, the lower the cost – for example, with some  policies a four week period would cost more than twice as much a month than a 26  week deferred period.

Do I need it?

Ask yourself the following questions. If your answer is no to all three, then  you need some form of IP:

  • Will your employer continue to pay you a percentage of your salary  indefinitely if you are off sick?
  • If not, and you are part of a couple, could you pay all the bills and live  on your partner’s income indefinitely?
  • If not (or you are single) do you have savings you could live off  indefinitely?

Remember: Illness, accident or disability can happen to  anyone. Currently (in the U.K.) 2.2 million people of working age will be off work for at  least six months because of sickness and disability, and more than 2.6 million  people are claiming incapacity benefit.


Which policy should I go for?

There are three main types of policies you can choose from; guaranteed,  age-related and reviewable.

Guaranteed: The amount you pay stays the same throughout the  policy term. The premium will only go up if you increase the cover. Most cost  slightly more to start with, but we believe they are best if you can afford the  extra cost.

Reviewable: These policies are reviewed by the provider  after a set number of years, typically every five, at which point the premium  may go up. However they tend to start off cheaper than guaranteed policies.

Age-related: These policies are good for people in  higher-risk jobs or for women and smokers because these factors aren’t always  taken into account when deciding the premium. Starting off cheaper than  guaranteed and reviewable policies, the catch is that the premium will go up  each year as you get older.

What will it cost me?

Premiums can vary hugely and cost is based on your gender (women pay more  than men); occupation; general state of health; whether you smoke and the level  of cover you need.

For example, a non-smoking man aged 30 in an administrative job could pay  between £17 and £36 a month for a policy that paid out £1,000 a month benefit  after 26 weeks. However a painter and decorator of the same age could pay  between £35 and £112 a month, depending on the provider. (These are U.K. figures but provide a reasonable guideline.)

Age-related policies don’t take gender, occupation or whether you smoke into  account.

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How your job affects what you pay

Your job can affect how much you pay for a policy (except with age-related  schemes).  Most insurers group jobs into four categories of risk, though  some have more.

We asked income protection providers to tell us how they grouped jobs, and to  give us examples of jobs in each class.

Here are some examples, but be warned – the same job may be treated  differently by different providers.

  • Class 1: Professional, managers and administrative staff.  Limited business mileage. Admin clerk, computer programmer, secretary
  • Class 2: Some workers with high business mileage over  20,000 miles a year. Limited light skilled manual work. Engineer, florist,  shop assistant
  • Class 3: Skilled manual workers and some semi-skilled  workers. Care worker, plumber, teacher
  • Class 4: Heavy manual workers and some unskilled workers.  Bar person, construction worker, mechanic

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