What would happen to your mortgage repayments if you couldn’t work because of a long-term illness or injury? In the latest part of our series on protection from mortgage intermediary Alexander Hall, Hatice Karadal, manager of the protection team, explains a bit more about income protection insurance, how it works and whether it’s right for you.
Income protection insurance is designed to help you financially if you cannot work because of a long-term illness or injury.
The most common causes of long-term work absences are stress, mental health, acute medical conditions and muscular-skeletal injuries. These conditions would all be covered under an income protection policy.
The average UK employee has enough savings for 32 days absence, according to the Deadline to the Breadline report by L&G. If an employee’s income is stopped, income protection insurance would ensure they would continue to receive a regular income until they retired or were able to return back to work.
Without income protection, people unable to work due to illness or injury are able to claim Statutory Sick Pay (SSP) from the Government. This will pay only £94.25p per week, and is only paid for a maximum of 28 weeks.
Safeguarding mortgage payments
For most people the monthly benefit of an income protection plan is used to safeguard mortgage payments and maintain household bills.
There are two types of income protection cover.
- The most common type of cover is long term income protection. This pays an income benefit for the entire length of the policy (i.e. to retirement age) if you are unable to return to work due to illness or injury. The amount of income benefit the policy pays out is set based on a percentage of your income or a specified chosen amount, and this cannot be more than your normal earnings.
- The second type is short term income protection, which is designed to cover a limited time period. This is much cheaper than long term cover, but the compromise means that each claim period is capped at either one or two years. You can make multiple claims throughout the length of the policy, but will need to return to work for at least six months after the claim period has ended, to be able to claim on the same condition again.
Do I need income protection insurance?
Most people think income protection insurance cover is only useful for people who are self-employed, or who have dependents. However, if facing an illness would mean you couldn’t pay the bills, then income protection is for you – regardless of your employment status or whether you have children.
Those who are self-employed or have limited sick pay periods from their employers have an increased need for this type of cover. Each year, a million workers find themselves unable to work due to a serious illness or injury.
Arranging an income protection policy will give you and your family the peace of mind that you can keep up with your mortgage repayments or rental payments even if you are unable to return to work due to ill health or an accident.
How much does income protection insurance cost?
Just like any other insurance policy, taking out an income protection policy earlier in life means that the cost of the premiums will likely be cheaper. How much you pay each month will depend on a number of factors, including age, occupation, smoker status, and how much money you need each month.
The waiting period before a policy pays out, known as the ‘deferred period’, can also influence how much the policy costs. This will depend on how long your sick pay is. For example, if you have no sick pay, you would most likely want the benefit to begin after four weeks, and this would come at a higher premium than a policy paying out after 13 weeks.
How to get the advice you need
With income protection, everything depends on getting the correct policy. It is not as straightforward as choosing a one-off lump sum pay out, and it is important you speak to an experienced adviser.
My team and I are impartial and focus on finding you the right policy, whether it is for the short term or the long term. We would make the right recommendation for you by taking into consideration what is most important to you and your family, and identifying how much income you might need if the worst happens.
