Income insurance consistently proves itself to be one of the most valuable safeguards we can implement for ourselves. No matter how hard we work to further our careers and strengthen our financial footing, there are never any guarantees that tomorrow, we won’t wake up and find our capacity to work significantly (or even permanently) changed.
Of course, it may not be quite as sudden or cut-and-dried as that. Illness or injury can gradually chip away at our ability to work the same hours or do the same jobs that once felt relatively easy – even, at one point, mundane. Whether you work a physically demanding job – one that requires a certain level of fitness, for instance – or not, the mind and body are equally liable to let us down.
If that happens, a safety net will come to mean absolutely everything. From understanding the limitations of income insurance to sticking with independent financial advice, here’s what you need to know.
What is Income Insurance?
Put simply, income insurance provides coverage against lost income. It does not protect against loss of income as a result of redundancy or being let go of by an employer, and it’s not a substitution for a life insurance policy (i.e., it doesn’t pay out to your family if you die).
There are many, many reasons why income insurance can prove invaluable. Loss of income has an instant knock-on effect when it comes to keeping up with the mortgage, paying bills, doing the weekly food shop, and even funding travel between your home and the hospital. Consider the fact that, earlier this year, it was reported that around 1.6 million adults aged fifty and over were unable to work due to long-term illness. Long NHS waiting lists were exacerbating the problem, and work still needs to be done before everyone gets the treatment they need, when they need it.
Income insurance is not the same as critical illness cover. Critical illness cover will provide a lump sum payment if you are diagnosed with a critical illness, whereas income protection insurance provides routine payments that continue for the duration of your absence from work, and only end when you are able to return to employment.
It’s important to remember that income insurance will not pay out your full salary. Payments tend to fall somewhere in the region of 50% to 70% of your earnings but, while there is some shortfall, they go a long way towards covering your essential expenses. Combined with statutory sick pay, income protection insurance pay-outs will represent a safety net you couldn’t have done without – particularly if your household relies on a single income.
Doesn’t every policy cover the same scenarios?
No. Like any product that offers insurance and protection, there are many different policies out there, all of which offer slightly different terms. There’s no universally applicable list of the very best income insurance policies out there because everyone is different – some people have particular risk factors that need to be covered while others will be better suited to a more general policy. The nature of your work – for instance, whether you work a manual job that will be harder to continue if you are seriously injured, or whether you work a less physical job – will also impact which policy is best suited to you.
Some policies are better suited to those who are older, who are considered higher risk – for instance, smokers and those who are overweight – and those who have a more complex family medical history. Every insurer uses a slightly different set of criteria to determine the cost of covering you, but the basics remain the same.
It’s also worth noting that some policies will be deferred longer than others. For instance, one may stipulate that claims cannot be made within a year, while others will stipulate a much shorter timeframe. Some policies can have additional ‘riders’, such as inflation protection. You can also look for policies that offer coverage for a higher percentage of your income but, for obvious reasons, these can prove much more expensive in the long run.
And, of course, some policies come with higher premiums than others. Finding a product that covers your specific circumstances as much as possible while proving affordable on a monthly or yearly basis is absolutely key.
How do you know what you need?
Insurance is a big topic to address, particularly when there are so many different potential circumstances you’ll want to cover. It can be tempting to opt for the policy that offers the most robust coverage all around and, in the heat of the moment – when your mind is racing with different worst-case scenarios – to saddle yourself with high monthly premiums on a policy you may not even be suited to.
This is where the importance of independent advice from professional financial advisors really matters. Insurance companies are underpinned by all sorts of restricted advisors – people who are only able to recommend a limited range of products. While they may have the best of intentions, they’re duty-bound to overlook policies that may be far better for you. Independent financial advisors can scour the full length and breadth of the market to ensure you get a policy that caters to your situation, proves affordable, and doesn’t leave you vulnerable to worst-case scenarios that you may be disposed to.
Risk Warning: Income protection insurance policies have no cash in value at any time.