The need to protect income against long term illness is an often overlooked part of protection planning. You need continuing income to maintain you and your family’s lifestyle even if you are ill and unable to work. Although state benefits are designed to help those in financial need, they are unlikely to fully replace a lost income.
Income protection schemes, previously known as ‘permanent health insurance plans’, are insurance plans that can pay a part of your pre-illness monthly income, tax free, until you return to work. The cover stops at the end of a pre-selected term which is usually at retirement age.
The plans have a waiting period before the plan pays out. The longer you can manage without the benefits starting the lower your premiums will be. Waiting periods are from four weeks up to a year. Some employers pay their staff who are ill for up to 12 months, sometimes on full pay for six months then dropping to half pay for six months. A plan starting to pay out after a year could then pick up the shortfall.
You are able to insure only 50% to 60% of your income as otherwise there would be little incentive to go back to work. The maximum amount of income you can replace is broadly the after tax earnings you have lost, reduced by any other sources of income have been allowed for such as mortgage payment protection schemes and state disability benefits.
The monthly cost of income protection schemes is based on a number of factors:
- Your age. Older people tend to have more illnesses and so pay more.
- Your health. If you have existing health problems you may pay more.
- Your job. Some jobs are more risky and so likely to contribute to illness, such as very physical occupations and those working at heights so expect to pay more. Surprisingly, Teachers are higher risk due to stress related illnesses.
- Lifestyle and hobbies. Smokers pay more, as do those with riskier hobbies such as motor bike racing, private flying, mountaineering etc.
- Waiting (or ‘deferred’) period. The longer you can go without benefits, the lower the premiums.
There are a number of definitions of being unable to work. It could mean you cannot do your job, which might be due to the job being quite specialised, or it could mean you cannot do any job, in which case you would have to be very poorly. If your illness means you could do a lower paid job, the insurance may pay out a proportionate benefit related to your reduction in earnings.
Income protection schemes are complex products and you should seek expert advice to investigate your options. Andy Wilson can help you to review your income needs and make arrangements to provide for them in the event of unforeseen events. Please use the ‘Contact Andy’ form below to arrange a meting to discuss your situation with Andy or to ask any questions.