Income protection How IP works
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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