Guide to income protection
Permanent Health Insurance (PHI) should not be confused with Private Medical Insurance (PMI).
Providing an income when you can’t work
An income protection, or permanent health insurance plan will provide an income if you are unable to work through disability, no matter how it is caused. The policy pays a monthly tax-free income for a set length of time – normally until retirement.
The payout can be level or set to rise with inflation. It pays as long as doctors agree that you are unable to work for health reasons. The maximum cover you can have is typically half of your provable income before tax. This is paid tax-free, so should you make a claim you will only be a bit worse off than you were before.
The insurers limit the amount of cover you can have so that you have an incentive to get back to work! Everyone should have this cover, because the State simply does not provide adequate protection, but many employers do offer it, so check your contract.
Premiums are kept down by setting it up with a “waiting period” between the onset of disability and the income kicking in, usually to coincide with the sick pay arrangements with your employer. In other words, it’s not meant for the flu, and the huge majority of claims are caused by back or mental health problems.
- Make sure you know the length of the deferral period before the policy pays out.
- Check that the income you will receive will be sufficient to meet your needs.
- Do not opt straight for the latest premiums as these policies may not be suitable.
- Do shop around.
Ten Things to Consider before buying income protection
- Premium How competitive is the price you are paying?
- Other benefits of income protection/PHI It is vital to know the other benefits you are entitled to as these will affect the amount that any insurance policy pays out. Do you know how much the State and how much your employer will pay you, and how long for?
- Guaranteed premiums Your premiums might seem cheap today but will they stay that way?
- Occupation class Are you insured if you cannot do you own job or if you cannot do somebody else’s?
- Amount of cover Typically you can insure up to approximately 65% of your gross salary free of tax. But how much do you need each month to live on?
- Length of term Are you covered for long enough? What will you do when your cover runs out? Typically income protection policies should run until your intended retirement age, unless your mortgage term exceeds this. If premiums are too expensive then cover can be limited to either one or two years, which while not ideal is far better than nothing at all.
- Deferred period Income Protection policies will begin to pay out after you have been unable to work for a set period of time. This time period is up to you and ranges from 4 weeks to 2 years. The longer the waiting period the less expensive insurance policies will be. How long could you survive financially without your income?
- Indexation Whilst most insurance policies can be linked to inflation it is particularly important to make sure income protection increases with inflation as your earnings typically would.
- Unemployment Income Protection policies do not automatically cover unemployment, although with most providers this can be added at an additional cost.
- Housewives/ house husbands Just because you don’t work this doesn’t mean you cannot insure an income. House persons can typically insure up to £15,000 per year. Remember to always consider the alternatives. Critical Illness might be more suitable for your circumstances.