Understanding income protection insurance

Income protection insurance is without a doubt one of the most beneficial life insurance policies you can have if you are in full-time employment. Surprisingly so many people overlook this type of policy as they don't know much about it but we want to change that!

Income protection insurance is one of the less talked about life insurance policies but we just don't understand why. The pay-out rates for income protection from some of the UK’s leading providers are huge, for example, Aviva paid out just over £44.7 million in income protection claims to their customers in 2020.*

We have pieced together the most essential information about income protection and put it all in one place! So have a read and who knows, this could be the life insurance policy that you didn’t know you needed.

What is income protection?

Income protection pays out a selected percentage of your income each month if you were unable to work due to illness or injury. This type of life insurance policy acts as a helping hand, financially safeguarding you so that you can recover without worrying about your finances. Your tax-free payments will start after a selected period and continue until you are well enough to return to work.

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Self-employed people can’t get income protection - true or false?

False!

Self-employed people could be considered the optimal candidate for an income protection policy as they can be some of the most vulnerable people in terms of employment, typically missing out on the benefits that traditional employment offers such as sick pay, maternity leave, death in service, and retirement plans.

The day-to-day life of a self-employed person can have its perks and although you may be juggling multiple roles at once, you have creative freedom, choose your work environment, and have control over your work schedule. But being your own boss can come with its downfalls - if you were to suffer from serious illness or injury, how long would you be able to continue business as usual?

For many, during the initial stages of becoming self-employed, finances can be fragile and things can easily crumble. An income protection policy can financially protect you if you are self-employed. In the event of you becoming critically ill or injured this policy will pay out a selected percentage of your income to you each month to ensure you can recover without worrying about your finances.

Multiple claims on income protection

Yes, you read that correctly - you can claim multiple times on your income protection policy!

With a level life insurance policy, if the worst were to happen to the policyholder (you) the policy would pay out a lump sum to your loved ones. After this, your cover will simply cease to exist. Whereas income protection is different as it is a policy that you can claim whilst you are still alive, and allows you to make multiple claims.

This means that during the term length of your income protection policy if you were to suffer from illness and injury more than once then you would be able to make more than one claim on your policy. This ensures that you are fully protected throughout your working life, offering peace of mind that if you were unable to work you would still be able to pay for the essentials to get by whilst you recover.

Objections

“It won’t happen to me” - We all know the saying ‘ignorance is bliss’ but when it comes to your health, no one can truly afford to think like this - according to cancer research, 1 in 2 people in the UK born after 1960 will be diagnosed with cancer during their lifetime.**
“Income protection policies rarely payout” - Income protection insurance is widely known to be one of the most common life insurance policies to payout and the statistics speak for themselves. In 2019, Aegon paid out 100% of their income protection claims.***
“Income protection insurance is so expensive” - The main factors that formulate how much you’ll pay for your monthly premium are your age, health, and occupation. There are also low-cost options and short-term income protection policies available. 
“I’ve got savings to get me through” - Even if you do have plenty of savings at your disposal, it is worth considering if you would want to allow food shops and utility bills to drain your hard-earned money. Not only that but once you have exhausted your safety net of savings - what would you do next? According to Aviva, the average payout duration of an income protection claim is just under 7 years!*
“My company will have my back” - The bitter truth is that most companies do not offer sick pay to their staff, hence why so many people have to rely on statutory sick pay (SSP) which in 2022 is only £96.35 per week. This is an unrealistic amount for most people to be able to live off - especially those who are renting and without savings. The average salary in the UK is £29,600 per year (£1,950 per month) which means on average someone receiving SSP from the government would be £1,564.60 worse off each month.

Income protection or critical illness insurance?

These two policy types are similar in regards to the fact they both provide financial support in the event of the policyholder becoming seriously ill. However, there are a few key differences between income protection and critical illness cover.

Income protection insurance pays out a percentage of your income to you each month to act as a helping hand, ensuring that you can still pay the bills whilst you are off work recovering. This policy pays out when the policyholder is unable to work due to serious illness or injury and generally income protection offers a broader definition of illness and injury compared to critical illness. For example, you can make a claim on your income protection policy for mental health illnesses such as depression, whereas typically you cannot claim for mental illness on a critical illness policy.

Critical illness insurance is designed to provide a one-off lump sum that will give you and your loved ones a financial boost during a difficult time. A critical illness policy will pay-out in the event of the policyholder being diagnosed with a serious illness from a list set out in your policy conditions. Once this lump sum of tax-free money is paid, the policy will end, unlike income protection which pays out each month.

These policies are more complex than a basic life insurance policy which only pays out upon death, so receiving specialist advice on these types of life insurance policies is essential to aid you in choosing the best cover. At Caspian, when arranging your policy, our specialists will assess your current circumstances and from this information, they will evaluate which policies are most suited to your needs.

What does income protection insurance not cover?

Put simply, an income protection policy will only payout for loss of earnings that are caused by illness or injury, so this policy will generally not payout in the event of redundancy or dismissal from employment. It is also worth noting that your unique policy may come with its exclusions specific to your disclosures but your Caspian protection specialist will advise you of this when arranging your policy.

Typically unsuccessful claims happen when misinformation is discovered, this is when inaccurate information about your health and lifestyle is given during the application process. If you disclose inaccurate information when arranging your policy to try and manipulate a lower monthly premium then if you ever needed to claim on your income protection policy, you risk your claim being rejected!

Occupation types and what they mean

When it comes to income protection, your occupation will be examined a little more than usual as what you do for work is fundamental to arranging your income protection insurance policy. When arranging a life insurance policy, you will have to answer various health and lifestyle questions. One of the main focuses when arranging an income protection policy is on your occupation, this is because an income protection policy is largely focused on your job. To claim on an income protection policy, you need to have suffered from serious illness or injury and be unable to work and the risk of getting injured is marginally higher in some jobs than in others.

Each provider has a list of occupation classes and different jobs are divided into classes depending on how dangerous the job is - this is how providers assess the risk level of your job. These classes vary slightly between different providers, for example, if your job involves using heavy machinery in your day-to-day you will always be in a higher occupation class compared with someone who works behind a desk, as your risk of getting injured and being unable to work is very different. The more dangerous your occupation, the higher the class it will be ranked in.

Each provider is slightly different but the basic concept remains the same, the riskier your job, the higher your monthly premium could be!

How much cover do you need?

With an income protection policy, the amount you are covered for is based on your current annual income and the policy can cover up to 70% of your monthly income. These tax-free payments will be provided to you each month, ensuring you can keep up payments for your regular outgoings and recover without financial stress.

At Caspian, our income protection specialists work on an advised basis, meaning they will assess your health and lifestyle, providing tailored advice based on your current circumstances. Once they have had an initial consultation with you and discovered what your financial needs are, our specialists can then establish any financial gaps you may have. They will then provide advice based on any gaps they find. This bespoke advice will help you determine which level of financial protection you need to accurately protect your income.

Is family income benefit the same as income protection?

Many people often get these two types of policies confused. The basic concept may be similar but these two policies are very different.

Income protection provides a replacement of your regular income to ensure you do not financially struggle if you were to become seriously ill or injured and unable to work as a result. Whereas family income benefit offers regular payments to the policyholder’s family after death or if they have been diagnosed with a terminal illness or pass away. Unlike a level life insurance policy which pays out a lump sum upon death, family income benefit insurance pays out a regular income to the policyholder's family to ensure they do not suffer from the financial burden if the worst were to happen.

To summarize, both policies offer monthly tax-free payments. The main difference is that income protection is designed to pay out whilst you are still alive and its priority is to financially protect yourself. Family income benefit is based on financially protecting your loved ones in the event of you passing away and being diagnosed with a terminal illness.

Short term VS long term income protection

Short-term income protection is essentially a low-cost alternative to a long-term income protection policy. A short-term policy does exactly what it says on the tin and protects a shorter term, typically with a maximum pay-out period of one to two years.

However, with long-term income protection, this offers a more sufficient amount of cover, typically covering you until your retirement age, ensuring that you are protected for the entirety of your working life.

With the amount of information available online, looking for life insurance can feel overwhelming at times. This is why specialist advice regarding your life insurance is beneficial in so many ways. Not only can our protection specialists help find you the best term length suited to your individual needs but they can also tailor this to your current budget and affordability.

Deferred periods - what are they and what do they do?

Unlike other life insurance policies, with income protection you need to wait for a short period before your monthly payments start - this is your deferred period. Your deferred period is the amount of time you need to be off work before your income protection payments commence.

Your monthly premium is calculated by evaluating a few different factors, one of which is the length of your deferral period. The way it works is the longer your deferral period the cheaper your premium will be and the shorter your deferral period the more expensive your premium.

If you have a long-term income protection policy, then you will have a shorter deferral period meaning you start receiving payments after as little as a month of being at work. According to Legal and General, people are 4 times more likely to insure their pets than themselves.****

So many people prioritize protecting nearly every other element of their lives except the person who pays for everything - yourself. If your income were to suddenly stop due to serious illness or injury, would you be able to afford to pay for everything else? Here at Caspian, we have developed a quick and easy income protection calculator so that you can see how much your monthly premiums could be in just 30 seconds. Click here to see how much it could cost to protect your income today.

*aviva.co.uk
**cancerresearch.co.uk
***aegon.co.uk
****legalandgeneral.com