Income protection is often recommended as an 'essential' for homebuyers but is it really worth the cost?
Income Protection Insurance is designed to replace part of your lost earnings for people who are unable to work due to disability or illness. But is it really worth the cost?
Income Protection Insurance, also known as permanent health insurance is generally considered to be a must-have for the self-employed who may not be able to cover the cost of living if unable to work because of ill health or accident. Income protection insurance, unlike critical illness insurance, pays steadily over the period that you are unable to work, as opposed to a straight lump sum.
If you are an employee, whether you need this sort of insurance depends on what your employer would provide in the way of sick pay or retirement benefits if you were unable to work. But how ‘unable to work’ a person is varies from policy to policy.
The three main definitions are:
- The inability to do your own job
- The inability to do a similar job for which you are qualified
- The inability to do any kind of paid work
What is not covered:
No policy will pay out while you continue to receive a full salary. Most will not pay out until you have been of work without pay for a ‘deferred period’ usually consisting of four weeks. Choosing a longer deferred period of up to 52 weeks reduces the cost of insurance. What you pay for your insurance depends on your age, sex, state of wellbeing and the kind of job you undertake. Women tend to face higher premiums as do people who are at a higher risk of injury due to the nature of their job.
You are not covered by the policy if you are unable to work due to:
- Pregnancy or childbirth
- Self-inflicted injury
- Alcohol or drug abuse
- Health problems you had before taking out the policy
- Participation in dangerous sports or other activities which you failed to disclose when applying for the policy
When you start shopping for your own insurance its best to stick to fixed premiums. A guaranteed policy will mean that you pay the same price each year and for the rest of your working life. An increasing number of deals want you to pay more in each year, in line with your age and company’s claims records. Though it is tempting to opt for one with low payments, they tend to increase over the coming years and are best avoided. The longer you can afford to hold out, the cheaper it will be in the long run.
If you do decide an income protection policy is the right move for you, you will face some rather large obstacles. Because policies vary, it is worth trawling the market and buying through an independent adviser or broker who specialises in protection insurance. They should be able to find you the best cover for your circumstances. The vast amounts of policies on offer mean that it is essential that you read the small print. These minor variations can mean the difference between being able to claim in full or getting nothing at all.
