Income Protection Myths Dispelled

So why the big difference between the number of working adults and those who have Income Protection? We take a look at some of the myths and misconceptions which might be causing this valuable product to be overlooked.

What is Income Protection?

First things first, many people don’t understand exactly what Income Protection insurance is, let alone why they might need it. Income Protection is an insurance policy that will provide a tax-free monthly lump sum should you be unable to work for a medical reason. Medical reasons can range from a commonplace sporting injury to life-threatening cancers or heart defects. But whatever the medical reason, if you are unable to work and earn, an Income Protection pay out will allow you to continue to pay your necessary monthly outgoings such as your rent/mortgage and bills.

How does it work?

Whether employed or self-employed, if you are unable to carry out the requirements of your job, due to injury or illness, then Income Protection insurance will pay out to replace part of your income. The amount you receive as a pay out is pre-determined by you and can be up to around 70% of your regular earnings.

All policies will have a ‘waiting period’ meaning you’ll have to be off work for a certain amount of time before the policy starts to pay you. You can select the waiting period to suit your needs when setting up the policy. We advise people to make this decision based on their sick pay entitlement with their employer and any savings they could rely on if necessary.

Once the waiting period has lapsed, the claim will begin paying out. This could continue until you can return to work or until the period (which is pre-defined in your policy) finishes, for example retirement age or after a two or five year period.

Doesn’t it cost a lot?

Many people assume that Income Protection is expensive, but often we find clients are pleasantly surprised that our quotes are a lot cheaper than they think. Insurance companies have made vast improvements to offer a wider range of cover and ensure more people can afford Income Protection. For example they have introduced the option of maximum claim periods of one, two or five years which offer an excellent level of cover but with premiums usually half the price of comprehensive cover, which doesn’t have a payment ceiling.

Another way to secure cover for a smaller premium is increasing the waiting period and saving a little each month to build a buffer to cover the waiting period if necessary. Or reducing the percentage of your salary you wish to cover can also bring premiums down. Keep in mind that if you are unable to work because of injury or illness, the chances are your outgoings will reduce anyway as you prioritise core bills and spend less on things like eating out, travelling or visiting the gym. Pay outs are tax free as well, don’t forget.

Will it actually pay out?

Yes! If you are honest with your adviser when you set up the policy, there’s very few reasons it won’t pay out when you most need it. One of the largest Income Protection insurers, Liverpool Victoria paid out over £14.5 million worth of claims last year; 22% for musculoskeletal problems and 18% cancer. Things that no one can predict but could impact any of us at any time.

As with all insurance policies there are exclusions – scenarios whereby the claim would be invalid and the policy wouldn’t pay-out. These vary between insurers but common exclusions are things like drug and alcohol misuse or self-inflicted injuries.

If you have suffered from a medical condition previously it may not be possible to cover this. Often if the condition has made you suffer in the last 3-5 years then you may have an exclusion on the policy, but this is why we review your policy frequently and help you to understand which policy is best suited for you.

It will never happen to me

The most common myth surrounding Income Protection Insurance is the belief that ‘I don’t need it’, because ‘it will never happen to me’. The reality, however, can be quite the opposite and rather sobering. Each year one million workers find themselves unable to work due to serious illness or injury (ABI). Nobody likes to think about illness, injury or being unable to work but unfortunately it happens, a lot. 31% of adults have experienced unexpected leave from work at some point according to (Aviva) and Statutory Sick Pay only pays £95.85 per week for 28 weeks, after the initial four days of illness. (Gov.uk)

According to The Office of National Statistics, 48% of households have either no savings, or less than £1500. Have you considered how you would cope if you were to lose your income, for whatever reason?

With savings diminishing in the UK and people focusing on other things rather than an emergency fund, the need to protect the core bills such as your mortgage, rent, food shopping, gas and electricity is paramount.

Income Protection is perhaps one of the lesser-known protection insurance products on the market, but certainly one everyone of working age should consider. If you have monthly outgoings and don’t have indefinite sick pay from your employer – or enough savings to keep you going indefinitely – Income Protection is a good alternative.