The main purpose of income protection insurance is to pay out a regular cash sum to replace lost earnings as a result of sickness or injury.  The purpose of these plans is for medium to long term planning.

Income Protection Deferred Periods

Income protection insurance pays out the cash sum as a regular income following your chosen deferred period.  When you set the policy up you will be offered a choice of deferred periods usually 1,3, 6, or 12 months.  During the deferred period you cannot claim should as illness or injury occur.  Employed individuals will often set the deferred period to the limit that their employers will pay sick pay, for instance 3 months.   Sole traders will often set the deferred period in line with their invoicing timeline so that they can be sure of coninued income during an illness or incapacity.  The longer the deferred period, the lower the premium becomes.

Income Protection Tax Treatment

If you are employed or self employed the proceeds of an income protection are usually set at a maximum of 60% of your pre-tax earnings but as tax free.  This means that although your income has dropped slightly you should still be able to maintain your lifestyle.

As an example Dave might earn £4000o per annum from his employer.  If he was to suffer a long term accident or illness his employer might continue to pay his salary for a short time but after his deferred period Dave would recieve £26000 per annum tax free from his income protection insurance policy.

Do You Need Income Protection Insurance?

You should consider incoem protection insurance if:

• you are employed and know that your employer will only pay you full salary for a limited time in the event of accident or illness
• you are self-employed and know that without your ability to work, your income will cease
• you have dependents who rely on your income
• you have a lifestyle that you would not be able to maintain without a regular income
• you accept the fact that savings will only last a limited time
• you accept the fact that you are only human and your chances of injury or illness are very real and are the same as everyone elses.

 

How Much Does Income Protection Insurance Cost?

Income protection insurance costs depend on:

• your age
• the level of income you want
• your chosen deferred period
• your occupation class.  Some occupations are considered riskier than others
• the term of the policy
• whether or not the policy is level or increasing

 

How Long Is The Income Protection Benefit Period?

Once you have successfully made a claim your benefit will be paid each month/week until the earlier of:

• you return to health enabling you to return to work
• your specified retirement age
• you die

You can also continue to receive your benefit if you do return to work but in a reduced capacity.  This is known as ‘proportionate benefits.’  Let’s assume that your benefit amount is £30 000 per annum and you suffer some kind of accident/illness that stops you from carrying out the duties of YOUR occupation.  You might not want to be at home every day so apply for a part-time job just to keep busy that pays a salary of £10,000.  Income protection insurance recognizes that you may well be working again but that you are still unable to earn your normal salary due to the nature of your accident/illness thus the gap between your part-time salary and the orginal benefit is filled by the insurance company – £20,000 per annum.  You still receive £30,000 per annum.

 

How Many Times Can I Claim?

Income protection policies allow you to claim as many times as necessary.  In other words, during your benefit period you continue to pay your monthly premiums.  If you return to work but susequently suffer another accident or illness period, the benefit resumes (obviously after your deferred period).

 

What Illnesses are covered by Income Protection?

All illnesses are voered by income protection insurance.  There are exculsions though and range from provider to provider but typically these exclusions will be:

• war
• normal pregnancy  or childbirth
• misuse of drugs or alcohol
• self-inflicted injury
• failure to follow medical advice
• criminal acts
• pre-existing medical conditions

 

Can I Have Income Protection If I AM Self-Employed?

Yes, income protection is vital for self-employed people in that it is yor own chance of received an income replacement should an accident or illness occur.

The difficulty for most self employed people comes when trying to show what their income is.  Most providers will use your pre-tax share of the gross profit after deduction of trading expenses, in the 12 months immediately prior to the date of your incapacity as a guide. Some policies operate an average over the last 3 years as they realise that self-employed people often have a fluctuating income and it is unfair to penalise you if the year before your accident was unusually bad.

It is worth noting that not all providers accept dividend payments as a personal income source so you may find that some providers will only insure your PAYE income if you are a limited company.