No one likes thinking about a future where they’re ill and unable to work, whether for a few months or longer. But going through the unpleasantness of thinking about it and making plans is nothing compared to the potentially life-changing impact of finding yourself ill, unable to work, and with no income.
Paying out for Income Protection Insurance each month can feel like waving money goodbye. But talk to anyone that has had to claim on it and you’ll have no doubt how glad they were it was there.
Income protection usually pays around 60% of your income for a set period of time, although you can choose policies which deliver a greater or smaller sum. It’s different from life insurance, which gives a payout to your loved ones after you die. Income protection helps you personally to meet your expenditure if you become ill. By covering your outgoings, it gives you peace of mind to either focus on getting better or adjusting to a new life. Savings may only be able to get you so far – and using them up might give you a very different future than you had planned.
Many people don’t know or overestimate how much sick pay they would get from their employer and for how long. UK statutory sick pay is only £116.75 per week. Some employers will pay full salary for up to six months, many don’t. Particularly for the UK’s 4.26 million self-employed, ensuring financial protection in the event of illness is a serious matter.
Let’s look at some of the different ways that having income protection can help make life easier.
MONTHLY INCOME REPLACEMENT
One of the most compelling benefits is the replacement of a significant portion of your income. This ensures you can meet your essential expenses, such as mortgage or rent, utility bills, and groceries, without depleting your savings.
LONG TERM SECURITY
Unlike some insurance policies that offer one-time payouts, income protection insurance provides continuous monthly benefits until you can return to work, the policy term ends, or you reach retirement age. This extended support can be crucial for long-term illnesses or injuries that prevent you from working for a longer period.
TAX-FREE BENEFITS
The monthly benefits received from income protection insurance are typically tax-free, providing you with the full amount to use for your needs. This maximises the financial support you receive during a difficult time.
TAILOR-MADE COVERAGE
Income protection insurance covers a broad range of illnesses and injuries, unlike critical illness insurance, which only covers specific conditions. As long as a medical professional signs you off as unable to work, you can make a claim. This flexibility ensures you are covered for almost any health-related work absence.
MULTIPLE CLAIMS
You can often make multiple claims on the same policy over its duration, offering ongoing protection if you experience repeated or different health issues.
PRESERVING SAVINGS & ASSETS
With this insurance, you don’t have to rely on your savings to cover daily expenses during illness. This preservation of savings is critical for long-term financial health, allowing you to keep your funds for future investments or emergencies. ensuring you have a steady income also prevents the need to liquidate assets, such as selling property or withdrawing from retirement accounts, to cover living costs.
SUPPLEMENTING EMPLOYER & STATE BENEFITS
Employer-provided sick pay is often limited, both in duration and amount. Income protection insurance supplements these benefits, providing additional financial security. For the self-employed, who typically do not receive any employer sick pay, this insurance is even more crucial. The policy can fill the gaps left by state benefits, ensuring you have enough income to maintain your standard of living.
Income protection insurance is a vital financial safety net, ensuring that illness or injury doesn’t derail your financial stability, and in many cases that of your family. But working out the type of protection you need, the amount of cover, and when it kicks in and for how long, can be confusing. It can sit side by side with a critical illness policy which will give a lump sum payout if you’re diagnosed with a list of serious medical conditions. The skilled advice of an independent financial advisor is essential in building up the correct policies to ensure you are fully protected.
