Arranging income protection insurance

Arranging income protection insurance can provide peace of mind in the event that you fall ill or are injured, so knowing what to look for when you compare policies is the key to getting the right cover for your needs.

How much cover do I need?

The maximum amount of income you can recover through income protection insurance is usually 50-65% of your gross monthly earnings (i.e. your earnings before tax). The payout is normally tax free so you do not need to insure your gross income. The more you insure for, the higher your premiums will be; therefore you may prefer to cover your main expenses only rather than all the payments you make each month.

Remember! As your earnings increase over time you should review the amount of cover you have. Some insurance companies will allow you to review this on an annual basis; others will require proof of salary increase, etc. You may also be able to "index link" your cover so that it increases in line with inflation. If you do index link your cover you should still regularly check that it meets your needs.

What about the deferred period?

Policies start to pay out after a deferred period, which is usually 4–52 weeks duration, and continue to pay out until you return to work or the policy expires (usually when you reach retirement or at the end of a fixed period).

You can choose the length of the deferred period when you take out the policy – the longer the deferred period is, the cheaper your premiums will be.

Remember! Always choose a deferred period that won’t cause you undue financial hardship

Remember! Your choice of deferred period also depends on the financial back up you have. For example, if your employer pays your full salary for the first six months of sickness then you only need cover from month seven.

What are exclusions?

An exclusion is a circumstance of event – such as a particular condition, illness or injury – that can prevent or invalidate a claim e.g. normal pregnancy and childbirth, self-inflicted injuries, misuse of alcohol or drugs and pre-existing conditions that were diagnosed or treated before the insurance policy was taken out.

Remember! Always check the policy documents for a full list of policy exclusions.

What factors affect the cost of a Long-term income protection policy?

Each insurance company has its own set of underwriting criteria to determine how much a policy will cost. They will ask a series of questions to everyone who is interested in taking out a policy with them as this helps them to identify the risk they are taking on i.e. how likely they are to pay out.

Generally, insurers evaluate (rate on) the same factors when calculating premiums, but as no two risks are identical, prices can vary from one company to another. The cost of your premium will be affected by the amount of benefit you want to receive, the deferred period, the benefit period (i.e. how long the policy will pay out for) and any optional extras you add to the policy.

Some individuals will be considered a greater risk to insure because there are factors which the insurer considers may contribute to illness or injury.

The main areas the insurer will look at are:

Age
Gender – women tend to pay more due to risks such as breast cancer and pregnancy related illnesses, etc.
Medical history
Family health history – may look at grandparents, parents and siblings
Occupation – rates whether the occupation is ‘high risk’ e.g. armed forces, pilots, fishermen, offshore oil or gas industries, people who work at heights. Also looks at the percentage of manual work, heavy lifting and so forth
Sports and hobbies – some pastimes are considered high risk e.g. climbing and mountaineering, hang gliding, motor sports, sky diving, skiing, horse riding, etc.
Smoking or tobacco use – due to proven links between smoking and some diseases, such as lung and throat cancer
Alcohol consumption – due to proven links between alcohol and some diseases, such as hepatitis and cirrhosis

The insurer may also adjust your premiums to reflect the level of risk you present. This may mean that your premiums increase from the original quotation or illustration you received.

Remember! Failure to disclose relevant information may affect your risk rating and could invalidate your policy.

What else should I look out for when arranging income protection insurance?

When an insurer assesses a claim it decides whether or not you are fit to work. This assessment will take into account the occupation profile of your policy.

If you have a "usual occupation" policy then the insurer will require you to be unfit to pursue your own occupation.
If you have a "suited occupation" policy the insurer will stipulate that you must be unfit to do your own job or a similar one for which you are qualified.
If you have an "any occupation" policy the insurer will stipulate that you must be unfit to pursue any occupation.

While usual occupation policies are generally the most expensive, they do offer the best cover.

Remember! If you change your occupation during the term of the policy you will need to inform your insurer, otherwise it may prevent or invalidate a claim.

Where can I buy an income protection insurance policy?

You can buy income protection insurance through a financial advisor, bank, building society or insurance company.

Remember! The cheapest policy may not provide the right level of cover for your needs. By paying a little extra for your insurance it is usually possible to secure better cover and therefore get better value for money.

Do I need independent financial advice?

If you are in any doubt about the type of income protection insurance or level of cover you require you may wish to seek independent financial advice before committing to a policy. Independent Financial Advisers (IFAs) are authorised by the Financial Services Authority (FSA).

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