Spotlight on Income Protection
Catherine Alexander
Partner
Do you need income protection? For most, the answer to this question is ‘yes’, but many simply don’t realise that they need it. Income protection (IP) insurance pays you a regular income if you can't work because of sickness or disability and continues until you return to paid work or you retire. This type of insurance was previously known as permanent health insurance (PHI). The income you receive is tax-free, and you are able to make multiple claims on the same policy.
So why don't more of us consider Income Protection?
1. I won't get ill
Many of us just don’t think it’ll happen to us. But it can, data from LV's risk reality calculator shows that a 35-year-old female has a 34% chance of falling ill and being unable to work for two months or more. What would happen if you were in the 34%, could you survive financially?
2. I can use my savings
Savings can act as a great buffer, and we always recommend having some easy access funds put aside, but worryingly 42% of employed adults believe they could only survive a month or less on their current level of savings according to research carried out by Legal and General. How long would your savings last? And the more important question might be, would you actually want to use your savings?
3. I will get sick pay from my employer
If you are relying on this, it is something you should check with your employer as many people overestimate the financial support which would be provided, if any. If you would get sick pay from your employer, how long would this be for, and how much of your salary would you receive? Most employees are entitled to Statutory Sick Pay of £109.40 per week for 28 weeks, but would you need additional support, or would £109.40 per week be enough for you and your family? Often sick pay is discretionary and tends to be looked at on a case-by-case basis by employers, which doesn’t provide much certainty. If you are self-employed you do not have any employer support, so income protection becomes a very important product.
4. I already have Critical Illness cover
You may already have a critical illness policy which pays out a tax-free lump sum if you fall ill with one of the conditions covered by your policy. This money could be used to replace your income if you were unable to work. However, policies will either pay out once and then you will not have cover for future illnesses, or the amount paid out is severity based, and you may not get as much as you would need at that point in time. You can claim multiple times on an income protection policy. Additionally, to be able to claim on a critical illness policy, you must have one of the conditions covered by your policy - with income protection it is much simpler, you just have to be unable to work and signed off by a medical professional.
5. I do not have a family to support
Income protection is a useful product when you rely on your earned income, no matter what your situation. It allows you to continue funding your outgoings so that you do not have to change your lifestyle.
If you are approaching retirement, have substantial savings, or have an employment contract that gives you sufficient sick pay then potentially you might not need it. But for most people, given the low level of state benefits available, and the lack of statutory sick pay for anyone who is self-employed, those of working age should consider some form of income protection if they can afford it.
This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice.
