Lighthouse : Why do I need income protection cover?

Even if you have savings, you might find it a strain financially if you were absent from work for an extended period due to illness or injury. While a short amount of time may be doable for some, mortgage costs, household bills and general everyday living expenses will quickly mount up if you're not receiving a salary, depleting those hard-earned savings. In these situations, having income protection cover is extremely valuable, taking away money stress so you can concentrate on getting back on your feet.

What does income protection insurance do?

Whether you're the family's main earner, self-employed, or receive limited sick pay from your employer, you can benefit from income protection cover. If you are unable to work due to injury or illness, and sometimes forced unemployment, you may be able to claim under your income protection policy to keep yourself going.

What kinds of policies are there?

There are many reasons why you might be unable to work, and likewise a wide range of policies to suit all eventualities. With a guaranteed policy, your premium remains the same regardless of the length of the policy term. It would only change if you decided to increase your cover. While this type of policy might initially be more expensive, it can be more cost-effective long-term.

Another popular type of policy is a reviewable policy, where the premium will change in line with your age and medical advances. This kind of policy may be cheaper than a guaranteed one at the outset, but here the premium has the potential to increase over time.

What payout can I expect?

The amount of insurance you require depends on your personal circumstances and the level of cover will vary for every individual. It's important to be realistic about the level of cover you need, only insure for a sum that is likely to pay out. Usually, you can insure for about two-thirds of the earnings you would have received after tax from your job, as it will not include any state benefits you can claim. Income from these policies is typically tax-free and you would have to provide evidence of your pre-claim level of earnings.

When you begin the policy, you select the deferred period; this will depend on your circumstances. You would normally have to wait at least four weeks before payouts start, but you can choose to defer payments for longer (for example, if you receive sick pay from your employer). Some providers offer immediate cover. The policy will then continue to pay out either until you return to work, or the policy expires.

Policies can also be short or long-term. Long-term policies have more expensive premiums, as they are designed to pay out potentially for the remainder of your working lifetime if you become so ill you can never return to work. While short-term income protection will only provide cover for a limited period (normally between six and 12 months).

Why should I seek financial advice?

With so many options available, it might be difficult to choose which type of policy is most appropriate for you on your own. This is where an adviser is able to help. To find the level of cover you need, you'll also need to consider what other monthly financial commitments you have, such as mortgage payments or credit card debt.

Nobody wants to put their family through financial hardship should the worst happen, which is why it is critical to get the right cover.

If you'd like to discuss the most appropriate type and level of income cover for you, just get in touch and we'll guide you through finding the option most suited to your financial circumstances.