Given the current climate, it is not surprising that income protection is a key concern for many people. Insurers have reported that the number of enquiries about this type of cover rose by more than 1,000% in March as the number of people fearing redundancy skyrocketed. Income protection is an insurance policy that pays out if you are unable to work because of injury or illness. It can include:
- Mortgage cover
- Redundancy protection
- Loan protection
- Accident and sickness cover
Despite it being probably one of the policies most needed, traditionally it has been one of the least popular products that people take out. According to a survey by Which?, only 9% had income protection compared with 41% with life insurance and 16% with private health insurance. It is, however, recommended for any adult of working age, as very few employers cover salary for more than a year, if you find yourself unable to work.
The cost of income protection is worked out depending on factors such as your health, whether you smoke and how much cover you need. Insurers also take into account the level of risk in your job.
Some insurance providers have started adding coronavirus exemptions or pulling out of the income protection market altogether. However, others have shown quite a bit of flexibility by offering payment holidays for vulnerable cases or offering the option to put policies on hold. They will still offer policies to those on furlough, although they will not pay out if you are made redundant.
A policy will usually pay out between 50%-70% of your earnings, tax free, although sometimes this is capped. It will pay for as long as the policy lasts or until you can go back to work, whichever is soonest. Most policies do not pay out until after a waiting period, which can be as long as 13 weeks on some of the longer ones.
If you are thinking of buying income protection to cover the COVID-19 outbreak, it is unlikely to pay out if you are only ill for a short while or are self-isolating. Most policies are designed for long-term absences. By the time the waiting period has passed, your period of illness or self isolation could be over and you could have gone back to work.
You may want to consider index-linking your protection. This means that it will rise with a measure of inflation such as the consumer price index (RPI). Otherwise you could come to make a claim only to find that the level of protection has not kept track with the way your salary might have risen.
A further consideration is ‘stepped benefit’ so that you opt to choose between two different levels of payment depending on the sickness benefits offered by your employer, a lower payment while your employer is still paying you a higher percentage of our salary and a higher amount when your employer reduces their contribution.
10 June 2020
The views expressed in this blog do not in any way constitute advice and are specific to the date noted. As time passes the facts can change and readers should consult their adviser for up to date advice on any matters covered within the blog. Invest Southwest offers an initial review, which is free of charge, however long it takes. From this we will be able to confirm how we can help and give you an opportunity to decide if you would like us to. Thereafter, we will provide you with detailed recommendations and exact costs. Please note that we promise not to levy any kind of fee unless we can demonstrate a benefit to you.
