For that very rainy day
If I lost my job due to accident or illness and was off for a long time how would this affect my lifestyle, family and ability to pay my mortgage and bills?
Have I got an emergency or a rainy day bank account in place to help plan for life’s uncertainties? (We recommend you have at least 3 to 6 months salary in a bank account which you have easy access to as a minimum.)
If you are thinking to yourself, oh, not sure about this, I’m sure my employer will help me out or the government, we recommend you speak to us for impartial advice.
We could prevent a serious dent in you or your family’s lifestyle. At the very least, asking for an expert opinion on your arrangements, will give you peace of mind that you’ve got everything you wish covered.
We have extensive expertise and experience in this field and can give advice over the phone, remote consultation via Internet or face to face whichever is easier for you.
What can you expect from income protection?
Income protection cover allows you to protect up to 65% of your gross (pre-tax) earnings from the risk of sickness or injury. Your policy can provide cover for a minimum of 5 years to a maximum policy term lasting until the national retirement age, currently set at 65 years.
Such a policy has the potential to pay you a monthly benefit equal to 65% of your gross earnings every month until either you return to work, retire or until the end of your plan term should you be unable to work due to sickness or injury.
Wouldn’t it be good to have a guaranteed monthly income?
Cover which guarantees a monthly income during periods when you are unable to earn an income can be worth its weight in gold during difficult times relieving you of the worry about how you are going to meet your monthly financial obligations.
Income Protection gives you the peace of mind of knowing you have a steady income to support you and your family while you concentrate on making a recovery.
Do you need income protection cover?
What would the impact be on your lifestyle and living standards if you were to lose your earnings for, say, 1 year, 5 years or possibly for the rest of your working life?
To put things in perspective, in August 2009 there were over 370,000 people claiming Employment and Support Allowance (ESA) for incapacity according the Department for Work and Pensions (DWP). Of this number there were over 100,000 people who had been claiming for over 6 months.
Unfortunately unless you have a substantial amount of savings, this form of protection should be considered by every working person in the UK.
One possible exception is if your employer already provides income protection cover as part of a wider employee benefits package. As part of our financial review of your overall circumstances we can advise you on this and whether taking additional cover is appropriate or not.
UK Government support
With government incapacity support (Employment and Support Allowance) standing at only £95.15 per week, sickness or injury would mean a substantial reduction in your standard of living for the majority of the working population if indeed you are awarded a successful claim.
Income protection cover is an important and well established method of eliminating this risk, with some insurers having offered this form of protection for over 100 years.
It’ll never happen to me, right?
With over 370,000 people claiming Employment and Support Allowance (ESA) of just £95.15 per week (as of August 2009) it is very unrealistic and financially imprudent to assume that ‘this won’t happen to me’. In fact, one leading UK income protection insurer released figures for 2008 showing that they have a historic payout ratio of 1 in 4 policies.
Why consider income insurance cover?
For this example let us assume you have been searching for a job, with a touch of luck and a lot of hard work you have had offers from two different employers. The first offers you a salary of £1,500 per month but offers you no sick pay with this, if you become ill for a prolonged period you will be expected to survive on government support.
The second offer was slightly lower at £1,450 per month but they have agreed to guarantee this salary to the age of 65 even if you are unable to work due to a long term illness or injury. Which one would you take?
How much cover do I need?
It is possible to insure up to 65% of your gross (pre-tax) monthly earnings. For example, if you have a gross salary of £40,000 you would be able to insure just over £2,160 per month. It really depends on how much of your outgoings you want to cover and what your budget is.
It should be noted that the payout from an income protection insurance policy is free of income tax as the premiums you pay each month contain Insurance Premium Tax (IPT).
You could always cover just the essentials. If your budget is tight, then it is better to have some cover rather than none at all. In this case it is important to establish how much you can afford and take out the maximum amount of cover your budget allows.
Key income protection policy factors
Length of cover
Policies can last for anything from 5 years to the national retirement age. It is most common for plans to last until planned retirement as this provides the most complete level of protection.
For example, supposing a person with 25 years left until retirement took out a policy and then needed to make a claim after 5 years for a condition that kept them out of work for the rest of their life, the policy would make payment every month for 20 years, minus the initial deferred period.
What is the deferred period?
Deferred periods range from 1 month to 12 months. It is usually sensible to set the deferred period equal to the amount of company paid sick leave you receive. For example, your company may pay you full pay for the first 3 months of being off work and Statutory Sick Pay for the following 3 months.
In this case, with Statutory Sick Pay standing at less than £100 per week it makes sense to set the deferred period at a length of 3 months.
Or if you are self employed, a shorter deferred period may be more suitable depending on your level of savings you may have.
Don’t get caught out
It is important to note that many people overestimate the length of time their company will provide sick pay above the statutory requirement, with some companies providing no sick pay benefit at all. Statutory sick pay is also paid for a maximum period of 26 weeks, after which it is necessary to apply for Employment and Support Allowance for incapacity, which currently stands at £95.15 per week.
The deferred period you choose can have a large impact on the income protection quote obtained, which shorter deferred periods commanding much larger monthly premiums. If you have savings that could support you for the first 6 months of incapacity then it might be more cost-efficient to set the deferred period at this length.
Given the long-term nature of income protection policies it usually makes sense to include guaranteed premiums.
This option ‘guarantees’ that your monthly premiums will not rise over the course of the policy, so that the first premium you pay is equal to the last.
Although the premiums are slightly higher at the start of the plan it prevents the insurer from increasing them over the policy life and usually works out slightly cheaper over the policy term.
Occupation definition? What is it and what do you need to know?
We usually recommend your policy includes ‘own occupation’ cover. With this option you would be covered for your own position and not be required to fulfil ‘any occupation’ or a ‘work tasks’ definition of incapacity. This is the best type of cover, fully comprehensive if you like.
However, if you work in an arts or manual orientated position this may not be possible and it depends on the insurer’s underwriting of your occupation. If you contact us we will be able to compare policies to see if your occupation can qualify and arrange the most suitable plan for you.
Self employed cover
Yes, self-employed can take out an income protection plan. This includes sole traders and directors of limited companies.
Self employed individuals can include dividends in their level of cover, should a claim arise income will either be assessed over the past 12 months or 3 years depending on fluctuations in earnings.
Example – Income Cover
John, he is in his late thirties, he has a wife and 2 children and provides the only income coming into the house. Lets see the level of income protection cover John would require to maintain his and his family’s standard of living.
John’s budget calculations if unable to work
Income John would lose
John’s net pay or take home pay £26,000
Deduct Johns government support
Statutory Sick Pay & Employment Support Allowance £4,500
Deduct Johns savings.
Work related costs, travel, clothing, food £3,500
Energy bills, treatment and special equipment 2,500
Extra income required £20,500 p.a.
If John had opted to forgo income protection and were unable to work for a prolonged period he would be left with a shortfall of income of around £20,500 per year. John instead insured this potential loss of income of £20,500 shortfall to ensure if he were long term ill, his family would be safe in the knowledge their financial obligations could be met.