If you’re unable to work because of an illness or injury, income protection insurance offers you an essential financial safety net. It provides you with regular payments to ensure that you can still cover your bills and other living expenses in the absence of your normal monthly income.
But with the high cost of living, can you really afford to pay for protection that you might not need? Unfortunately, things can and do happen. Without protection in place, think about how you will afford to live without being able to work and receive a salary.
The good news is that income protection insurance is more affordable than you might think. The cost is based on various factors, such as the level of cover you prefer and your personal circumstances. The policy can be tailored to ensure that it meets your budget as well as your needs. So the question is, how much is income protection insurance?
What is income protection?
First, it’s important to understand exactly what this type of insurance is. Income protection acts as a replacement salary when you cannot work due to an illness or injury. It pays a percentage of your salary, usually between 50% and 70%, which you receive monthly and tax-free. The payments can either be received for a set period, until you return to work, the policy ends, you retire or you pass away. You can claim as many times as you need to during your policy term. This is different from other types of protection, such as critical illness cover, which only allows for one claim.
You can opt for short-term protection, allowing you to receive payments over a short term, such as 6 months to 2 years, or long-term protection. Short-term income protection is cheaper than long-term protection. For the latter, you can benefit from receiving payments over a much longer period, such as until you retire.
What levels of cover are provided?
You need to choose the level of incapacity that will warrant a claim. This can be for your own occupation, a suited occupation or any occupation.
- Own occupation: This covers you if you’re unable to do your specific job. Your medical condition doesn’t have to be debilitating. Giving you the highest level of cover, this is the most expensive option.
- Suited occupation: For this level of cover, you can make a claim if your illness or injury renders you unable to do your own job or unable to carry out a similar job that is suited to your experience and skill set.
- Any occupation: To claim for this level of incapacity, you must be unable to do any job in any role. Whilst this is the cheapest option, there is a higher risk of claims being unsuccessful.
When are the payouts made?
When you arrange your policy, you need to agree to a deferral period. This is the time that will lapse after you’re unable to work and make a claim before you start receiving payments. These periods vary between insurance providers but usually range from 4 weeks to a year. The longer you can defer your payments for, the cheaper your premiums will be. Therefore, think about what sick pay benefits you’ll receive from your employer and whether you’ve got any savings to tide you over before you’ll need to start taking the payments.
How much is income protection insurance?
There are various factors that affect how much your income protection insurance costs.
Personal circumstances
Some of these factors include your personal circumstances, such as your:
- Age. The older you are, the higher your premiums will be. This is because you’re at a higher risk of having health issues.
- Occupation. Some occupations have an increased risk of injury, such as construction workers, firefighters or military personnel. In this case, the premiums you pay will be higher.
- Medical history. Your health and your family’s medical history will be taken into account. If you have a pre-existing condition or you’re in poor health, your premiums are likely to be higher.
- Lifestyle habits. Certain lifestyle habits can also increase your premiums. For example, if you enjoy doing high-risk activities or you’re a smoker.
- Income. The payouts are based on a percentage of your income so if you earn a high income, the payouts made by the insurance provider will be higher. This means that your premiums will be higher as a result.
Policy choices
Other factors that affect the cost of your income protection insurance include:
- The level of cover you prefer. Choosing ‘own occupation’ cover offers a higher level of protection and, as such, is the most expensive option. ‘Suited occupation’ provides mid-level cover while ‘any occupation’ only covers you if your medical condition means that you’re unable to work at all in any occupation.
- The payment term. Whether you prefer to receive payments over a short term or a long term affects how much you’ll pay for your premiums. A shorter term is the cheapest option but you should consider what will happen if you’re unable to work for a considerable time.
- Your chosen income percentage. Generally, you can choose between 50% and 70% of your salary to be covered. The higher the percentage you want to receive, the higher your premiums will be.
- The policy term. The length of your policy term also determines the cost of your premiums. The longer the term you choose, the more you’ll pay for your premiums. A typical term choice is your expected retirement age so that you have cover throughout the remainder of your career.
- The agreed deferral period. The longer you can wait before receiving payments after you’ve made a claim, the cheaper your premiums will be.
- Guaranteed or reviewable premiums. Guaranteed premiums stay the same throughout your policy term unless your policy is amended. Reviewable premiums are periodically reviewed by the insurance provider and can change as a result. This type of premium may be cheaper to begin with but will increase during your policy term.
Is income protection worth it?
No one can predict what’s around the corner and if you suddenly find yourself unable to work due to an illness or injury, will you be able to support yourself or your family financially?
For example, if you have any substantial financial commitments to meet each month, such as paying your mortgage, can you still maintain these payments? If not, income protection can provide the cover you need for this.
If you don’t have any savings, you don’t have a buffer to give you financial protection should you continue to be unable to work once your sick pay benefits have ended. Income protection is a way to ensure that you still receive financial help.
If you’re self-employed, you don’t have the luxury of sick pay benefits to fall back on. In this case, income protection is a vital consideration in case you can no longer work.
Therefore, whether or not income protection is right for you really depends on your situation. Our mortgage and protection brokers can discuss your situation in detail and suggest alternative options for you to compare. You may find that a different type of financial protection, such as life insurance, is more suited to your needs.
Have you got a financial safety net in place?
Our mortgage and protection brokers are here to find the right income protection policy for you at the best price. They can guide you on ways to keep your premiums more affordable and compare the options from different insurance providers. Your policy will be tailored to meet your specific needs, such as your preferred income percentage, payment period and deferred period. That way, you can be sure that adequate financial support will be provided should the need arise. To increase your financial security and have peace of mind that protection is in place, give us a call on 01322 907 000.