Emily Pool discusses Income Protection Insurance

When Disaster Strikes Can You “Keep Calm and Carry On”?

If disaster strikes we all hope we are resilient enough to do the British thing and just keep calm and carry on, but what happens if we can’t? What if we need to take some time out? What does that mean for you and your family?

Most of us insure our cars, our houses, our home contents, but very few of us insure the very thing that our lives depend on – our income.

Each year one million people in the UK find themselves unable to work due to a serious illness or injury (ABI 2017). We all know someone who has been affected in this way and let’s be honest, most of us will tell ourselves – “it won’t happen to me”. Our eternal optimism keeps us in denial, but if we are unlucky and the metaphorical lightning strikes, we could find ourselves up the proverbial creek without a paddle.

So what is Income Protection Insurance and why might you need it?

Income protection insurance (sometimes known as permanent health insurance) is a long-term insurance policy designed to help you if you can’t work because you’re ill or injured. It will provide you with a regular income to replace your lost earnings, for a fixed period, until you retire or until you are able to return to work.

To establish if you need it ask yourself these questions:

• Would my employer cover me for sick leave? If so, how long for? Statutory sick pay is limited to £94.25 for 28 weeks (for employees who earn at least £113 per week and are incapable of working for more than four days in a row) – needless to say that this is not likely to be sufficient to sustain a family;
• Would my partner be able to earn more in the event that my income stopped? Is there anyone else I could rely on in a crisis (parents, siblings etc)? If so, bear in mind that this could create a debt that will need to be repaid;
• Do I have sufficient available cash savings to cover essential expenditure, such as mortgage, loan repayments, domestic bills, car running costs, food, etc., and how long would this “Emergency Fund” last?
• Do you have any other insurances, such as Critical Illness Insurance, which would pay you a lump sum on diagnosis of a specified illness? If so, I recommend you review the policies, perhaps with the help of an Independent Financial Adviser, and consider whether the conditions covered are broad enough, and check that your insurance provider has a good track record of paying out and calculate how long this lump sum would last you if you had no income.

By answering these questions any “gaps” will become immediately evident. You could consider how you might be able to re-jig your affairs, i.e. release capital or cut expenditure, but the reality is that resources are likely to be limited and you may not have scope to make the required sacrifices.

How does it work?

Income protection insurance comes in two forms: 1) Individual Income Protection; and 2) Executive Income Protection for business owners. There are particular tax advantages for business owners who can pay the premiums (before tax) and claim the benefits (after tax) through their company. This can cover both salary and dividend income and, in some circumstances, can even cover a spouse’s income from the company too. Individuals pay their premiums out of net salary (taxed through PAYE) and receive their benefits tax-free.

In order to match premiums to your budget you can choose your level of cover up to a maximum, and choose your “deferred period”, which is likely to be based upon the length of time you can “survive” before needing to claim under the policy, i.e. your employer’s benefit period or the number of weeks or months that your “Emergency Fund” would cover.

Before you all run off and sign up for policies paying millions, bear in mind that you are only able to cover between 60% and 75% of your normal gross salary, so the benefits will be close to a basic rate taxpayer’s net salary.

How do I get myself covered?

There are many providers of IIP and EIP, and many offer the added benefits of second medical opinions, counselling and even key person protection (for businesses), plus help with funeral expenses. So, all round it is a very useful policy to have.

If you are a business owner, pivotal to your business, with a dependent family and large monthly outgoings, ask yourself the questions above – and consider whether IPI or EIP could be the answer to your sleepless nights.

For more information on policy features, medical underwriting, and indicative costs, please speak to an Independent Financial Adviser.

Risk warnings

These types of plans typically have no cash-in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

The definitions vary between product providers and are subject to the individual conditions of the plan. They will be described within the Key Features and policy documentation if you proceed with the plan.