What is it?
Income Protection Insurance, also known as Permanent Health Insurance, is designed to provide you with a tax free income if you are unable to work due to an accident or illness. This insurance allows you to concentrate on getting better rather than worrying about how you are going to pay your bills.
You can generally cover up to 60% of your current income, although this does vary between insurers. Some insurers also link their payments to the Retail Prices Index, keeping pace with the true cost of living.
You can also insure full time stay at home parents. A policy will pay out an income to cover any costs incurred employing someone else to carry out important household duties, such as the school run, cleaning and cooking, should the carer fall ill. As you’ll see coverage can be wide ranging.
When taking out a policy you can usually choose which of the following definitions will be used to assess a claim if you become ill:
• Own occupation - this will pay out of you can no longer do your own job
• Any suited occupation - in order to receive benefits you would need to be unable to follow either your own occupation or another occupation suited by training or experience.
• Any occupation – this would pay out if you were unable to perform any job.
• Work Tasks – you will be able to claim if you cannot perform a number of everyday work tasks, such as walking, lifting, reading and hearing.
• Activities of daily living – you can claim if you cannot perform a number of everyday living tasks unaided, such as dressing, washing or using the toilet.
Things to watch for
· The premium for Income Protection Insurance depends on your current state of health and medical history, age, sex, occupation, level of incapacity you choose and your chosen deferred period.
· The deferred period is the number of weeks you can manage before you need the income payments from the policy to kick in. Usual deferred periods you can choose from are 4, 8, 13, 26, 52, 56, 104 or 112 weeks. If, for example, your employer pays you sick pay for 12 weeks, you could pick a deferred period of 13 weeks, meaning your income payments from the policy will start once your employer’s sick pay has stopped. The longer the deferred period you choose, the cheaper this insurance is.
· If you start a new job, make sure you or your financial adviser inform the insurance company. Failure to do so could invalidate any future claims.
An Income Protection Insurance policy will start to pay out after the agreed deferred period. These payments will then not stop until you are either:
• well enough to return to work;
• reach the end of the policy term;
• reach retirement;
• or die.
During the policy term, there are usually no limits on the number of claims you can make.
In addition to the main benefit some policies will also include provision for proportionate and rehabilitation benefits.
Proportionate benefit, where offered, means that if the nature of your incapacity allows you to take up an alternative occupation, but you cannot earn the same level of income, the policy will pay out a reduced amount on top of your new salary.
Rehabilitation benefit is an income payment that helps you if you do return to your main occupation, but earn less as a result of your incapacity. This is generally restricted to a short term, such as 24 months, after which payment will stop.
The terms of both of these benefits, if they are offered at all will vary between policies and insurers.
If you need more help deciphering the complex exclusions and differences in cover, seek some advice and contact us today.