One of the biggest fears for many people is not being able to pay the mortgage - or meet other financial commitments - if they are made redundant or unable to work due to illness or accident.
This is particularly worrying in the current uncertain climate, but one of the simplest ways to cover loss of earnings is by taking out income protection.
What is income protection?
Income protection pays out a regular tax-free replacement income if you are unable to work because of ill health or an accident; it enables you to pay the mortgage, as well as the daily costs of living.
How does it work?
Income protection policies pay out a set amount of income after a specified period of time, and you can elect a waiting period of between one and 12 months; the longer you defer, the cheaper the policy.
It usually then pays out until you either return to work, retire, the policy expires - or death.
How much does it cost?
Premiums are based on age, health, amount covered, term of the policy, waiting period, and whether you smoke.
For a 25-year old male with cover until the age of 60, the average premiums range from £23 per month for a four-week deferral period, to £11 per month for a 52-week deferral period (*).
The rates for women are slightly higher, and the average cost of for a 25-year old female with cover to age 60 range from £34 per month for a four-week deferral period, to £15 per month for a 52-week deferral period (*).
Should I take it out?
While a life insurance policy might be the first protection that springs to mind when you have children, and mortgage payment protection insurance (MPPI) the first policy when you buy a new home, income protection could actually be the better option.
This is because it's a lot more likely that one or both parents will not be able to work through long-term sickness than through dying, and because MPPI offers limited cover, and policies can be relatively difficult to claim on as they often include a number of exclusions.
What about PPI?
Payment protection insurance (PPI), a similar policy to MPPI, but which covers other debts, such as repayments on loans or credit cards, is also notoriously unreliable when it comes to paying out in the event of a claim, and can often be over-priced and mis-sold.
Nonetheless, if you do qualify for a payment, the short-term lifeline it offers can help you to survive a financial crisis, so it should not be dismissed out of hand - but a cheaper alternative may be to buy PPI from a standalone provider.
When should you take out income protection?
Before taking out income protection, check what cover you already have through your job, as many companies offer life assurance and sickness benefits.
The level of cover required from income protection varies from person to person, so after finding out what is offered by your employer, calculate your current expenditure and take out cover to meet the shortfall - but bear in mind that your outgoings may be cheaper if you're not at work.
If you do decide to take out the insurance, it's a case of the sooner the better, as younger and healthier individuals will be offered cheaper premiums, plus it's beneficial to take out a policy before there's any sign of trouble - to ensure you have the necessary cover in place should anything go wrong.
What about other protection products?
Further to income protection you may also want to consider life cover with a good critical illness policy which pays out a lump sum if you are diagnosed with a specific serious illness; the two tend to be sold together.
Some providers also offer “menu” plans where you can combine different levels of life cover, critical illness cover and income protection in one policy; the combined package can work out cheaper than buying each product separately.
However, as with all things financial, it's crucial to take the time to shop around - and to read the terms and conditions before signing up.
Notes:
(*) Figures provided by Defaqto; premiums correct as of 13/01/10.
