Protecting your earnings against job loss is a serious business, but not one many people think about.
Income protection covers you should you suddenly become unable to work, whether this is through redundancy or ill-health.
State benefits, while useful, are not generous – so income protection can help pay your bills while you are out of work.
Mhairi Duffin, insurance analyst at Confused.com, says: “Income protection is one of the most important but least known insurance products around.
“Unlike life insurance cover and critical illness which are about covering your dependents if anything should happen to you, income protection is about you covering yourself if you can’t work.
“This means you’ll be able to pay your rent or mortgage, and other bills.”
How it works
It all sounds very good, particularly in the current uncertain economic climate, but make sure the policy you’re paying out for is one you can claim on.
The first thing to be aware of is that there are two types of income protection.
Short-term income protection
Also known as accident, sickness and unemployment cover, this cover usually pays out for a fixed period of 12 months.
Cover is relatively cheap – you pay a small monthly premium.
However, this cover typically excludes certain health conditions such as muscular-skeletal pain. This would rule out being able to claim for being off work due to a bad back, for example.
Mental health problems are also typically excluded.
You can select a waiting period of between one and 12 months before the policy pays out. The longer you defer, the cheaper the policy.
Long-term income protection
Also known as permanent health insurance, these policies normally cover you if you can’t work due to sickness, accident or disability, but unemployment cover can be added on as extra.
These policies are usually sold through financial advisers as they’re underwritten by an insurer, which means it’s priced according to risk.
However, these policies do last much longer – if you can’t work due to ill-health, the cover will pay out until retirement.
These policies usually replace between 50% and 65% of your salary.
You can choose a waiting period of between four and 52 weeks before your policy pays out. Again, the longer you wait, the cheaper the policy.
These policies usually contain no automatic exclusions for health conditions.
One of the most important things to look out for when buying any income protection policy is that you can make a claim if you’re unable to perform your own job – “own occupation”.
Although less common today, some policies still exist that will only pay out if you are unable to do any job – “any occupation”.
The Financial Ombudsman Service, which handles consumers’ financial complaints, says that most income protection complaints it sees relate to this area, and says insurers should make this clearer.
A spokesman from protection insurance specialists LifeSearch says:
“Being covered under any occupation means that you have to be unable to perform any job. This can include working from home stuffing envelopes, or stacking shelves at the supermarket.
“Equivalent earnings to the job you were doing before are not taken into account.
“If your policy states anything other than ‘own’ or ‘suited’ occupation, you should seek independent advice.”
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’s offered by your employer, calculate your current expenditure and take out cover to meet the shortfall.
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.
It’s also 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.