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Protecting what pays for everything: your income

06 October 2014

You are 3 times more likely to go on long-term sick leave than you are to die during your working life, yet only 1 in 10 of us has Income Protection*.

Why you should consider Income Protection

You may think that you do not need to worry about this kind of cover, but the fact is that in the UK there are over 11 million people with a limiting long term illness, impairment or disability and 1 in 7 working age adults suffer from a disability1. And the reality is that for most people, state sickness benefits would be unlikely to cover the outgoings of the average family.

Income Protection via your employer

  • If you think you’re covered through your employer, it’s worth double-checking.
  • Some employers provide income protection insurance, but a very large number do not.
  • Employers are only legally obliged to pay for the first 28 weeks of you being unable to work because of an illness or injury, and even then they do not have to pay you your full salary.
  • If your employer provides cover, the benefits generally continue to be subject to income tax and national insurance, at least initially, but the premiums are usually not taxed as a benefit in kind.
  • If you take out the cover yourself, the benefits are tax free but you do not get tax relief on the premiums.

If you cannot work because of illness or disability, income insurance will pay up to half to two-thirds of your pre-tax income. If you have no income, you may still be able to take out a policy, but the maximum payout will be limited, generally to an income of about £20,000 a year.

The cover normally lasts until you are aged 60 or 65, but you can arrange the insurance for much shorter periods – say five or ten years and this cover is normally cheaper because it is substantially less valuable. The chances of having a serious illness or disability increase substantially as you grow older.

1 in 7 working age adults suffer from a disability 

Exclusions

Almost all illnesses are generally included in the cover, but most have a few excluded illnesses. It is always worth checking conditions and exclusions on income protection insurance policies for example if the illness is caused by drugs or alcohol abuse.

There is also an important difference between being covered for being unable to work at your own occupation and cover for being unable to work at any occupation. It is much better to have the first type of cover, even though it is likely to be the more expensive.

How Income Protection differs from Critical illness insurance

Critical illness insurance pays a lump sum if you are diagnosed as suffering from a specified illness. Over 30 conditions may be covered, including some forms of serious cancers, heart attack and stroke.

The advantage of critical illness insurance is the benefit is paid very early, at diagnosis of the illness, without any significant delay – unlike the waiting period of income protection.

It is also in the form of a lump sum that can allow you to make rapid adjustments to your lifestyle and pay off loans.

The main drawback is that this type of health insurance only covers a limited set of conditions. These are common disabilities, but critical illness insurance generally does not cover some important conditions, such as most mental illnesses.

Critical illness is an important and valuable addition to income protection, but it should not normally be regarded as a replacement for it.

Insurers will generally only pay a proportion of your recent earnings as benefits, which can be hard for people who are self-employed or have fluctuating earnings.

Inflation protection

It is normally advisable for income protection insurance to be inflation protected otherwise if the benefit payments never increased after you fell ill and could not work, their real value would be gradually eroded over the years. 

You will get the best terms if you work in an office, mostly indoors and do little or no manual work.

Underwriting 

Insurers are careful when people first apply for income protection insurance. If you have a health issue, the insurance company may exclude the particular problem, or they may increase the premium or possibly decide not to insure you. Insurers also pay considerable attention to your occupation. You will get the best terms if you work in an office, mostly indoors and do little or no manual work. The cover is much more expensive for people who work with machinery or in relatively hazardous places like factories and farms.

Claiming

If you have to make a claim under the policy, the insurance company will continue to pay you the benefit until you are well enough to return to work. Then if your illness recurs, they should start paying the benefit again. Unsurprisingly they will want to check from time to time that claimants are genuinely incapacitated.

Income protection can appear relatively expensive, but can be very valuable if you fall seriously ill.

The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.

* Source: www.unum.co.uk, 27 January 2014

1 Source: Taxbriefs, May 2014 

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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