Income protection insurance: An essential guide

Mortgage Insurance: The Essentials

Have you considered what would happen with your home and mortgage should you or the main breadwinner in your family became critically ill or even die? Although it is not a nice subject to talk about, it is vital that you give mortgage insurance, such as life insurance some serious thought and then take action to ensure that you have the right mortgage protection insurance in place, should the worst happen. Mortgage insurance gives you peace of mind, knowing that your mortgage and home will be protected for your family in your absence.

Every year, up to a million people in the UK are unable to work due to being ill or injured. If something happened to you, would you be able to cover your mortgage, bills and family running costs? Many people can't and need some other way of 'staying afloat'. Taking out income protection insurance is one way of ensuring your outgoings will be taken care of whilst you are unable to work.

You may already have life insurance in place, but that only covers you if you die. In the event that you suffer a serious illness or injury you need another type of mortgage insurance for piece of mind such as income protection insurance or critical illness insurance.

This guide will tell you all about income protection insurance and answer key questions you might have such as "what is income protection? and "is income protection worth it?"

If you want to find out more about critical illness insurance, click here.

Income protection insurance is a long-term insurance policy that is designed to assist you if you are unable to work due to illness or injury. One of its defining points when compared to a critical illness policy is that it can cover musculoskeletal problems (such as back problems) and psychological issues (such as stress and depression) if they prevent you from working.

It provides you will a regular income until you are able to return to work, until the policy ends or until you reach your retirement date. It usually replaces a portion of your income and covers most illnesses and injuries that mean you are unable to work.

Policies will usually have a 'deferment period' which dictates how long you need to be sick before the plan begins to pay out. This period is typically set to match any sick pay that you would receive from your employer. For example if your employer would pay your salary for up to 6 months in the event of you being too sick to come to work then your income protection policy could be designed to kick in after those 6 months have elapsed.

If illness or injury meant that you would be unable to cover your mortgage repayments or any other outgoings such as utility bills and medical fees, then income protection could be for you. You may feel like you particularly need it if you have children or other dependants or if you are self-employed with no sick pay benefits.

You might not need it, however, if you get sufficient sick pay in your employee benefits package or if you think you could survive on government benefits. Or you might have a large amount of savings in place or a partner or family who would be able to support you if needed. Bear in mind that all of those can change, for instance you could lose your job or find that family do not have the funds when you need them.

There are 3 main options when it comes to how a policy protects the policyholder:

  • Own occupation

    If a policy is underwritten on an 'own occupation' basis it means that any claim will be considered in light of your ability to perform the usual daily tasks of your job. This means that an insurer cannot ask you to take up another line of work rather than pay a claim.

  • Suited occupation

    If a policy is underwritten on a 'suited occupation' basis then any claim would be reviewed in light of your ability to work in an occupation that your qualifications and experience are suited to rather than just your current job.

  • Any occupation/work tasks

    If a policy is underwritten on an 'any occupation', 'work tasks' or 'activities of daily living' basis then any claim would be reviewed in light of the ability of the policyholder to complete certain tasks. Typically these include things such as lifting, bending, walking and clothing oneself.

There are also 2 main types of premium calculation:

  • Guaranteed premiums

    Premiums are guaranteed to stay the same for the duration of the policy term. It can be more expensive initially but often works out cheaper in the long run.

  • Reviewable premiums

    The policy is reviewed at regular intervals which could result in your premium going up each time.

Usually, the maximum amount of income you can get with income protection insurance is around 70% of your gross monthly earnings although this varies from provider to provider. You can choose to insure for less than that, however, if you want lower monthly premiums. Some insurers will also offer the option of protecting the value of other employment benefits such as company cars or private medical insurance.

When working out how much income protection cover you need, factor in state benefits, the value of other protection schemes you already have plus the value of your savings and weigh these against your outgoings.

An insurer will work out your income protection quote by considering a range of factors including:

  • Your age - the younger you are, the cheaper your quote will usually be.
  • Your job - some jobs are considered more dangerous than others.
  • The deferment period - the longer you have to be sick before the policy begins to pay out, the cheaper the premiums will usually be.
  • Smoking - if you smoke, your quote will be higher.
  • Existing health problems - if you have existing health issues, insurers may be less inclined to offer cover.
  • Alcohol consumption - if you drink more than the weekly recommended amount, you could be seen as higher risk.

Income protection insurance can offer a straightforward solution to covering longer periods of sickness. It can be far less complicated than critical illness policies, particularly if you are able to obtain cover on an 'own occupation' basis as you always know you are protected if you are unable to complete your usual responsibilities. We suggest that you seek advice to find out which policy will best suit your circumstances.

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*https://www.moneyadviceservice.org.uk