Last year more than two million people, between the ages of 18 and 64, in the UK were forced to claim incapacity benefit after being signed off from work through illness or injury. Of these 80% were claiming for more than six months and 40% were claiming for more than five years.
Unfortunately, relying on the State is unlikely to be enough to cover many people’s outgoings and maintain their standard of living. Therefore, the need to protect one’s income has never been more important.
Is income protection right for me?
If illness or injury stopped you from working, then how would you cope from the resultant loss of earnings? Unfortunately, the bills still need to be paid and your outgoings do not stop even if your income does.
Income protection is a form of insurance cover that will pay out a prespecified amount in the event that either an illness or accidental injuries were to stop you from working. All payments are made tax-free (in certain cases up to 60% of your annual income) and are designed to cover your financial commitments during the period you are unable to work. Payments can be made monthly or annually in advance or in arrears.
Income protection is most suitable to the following types of people:
- those with family responsibilities;
- home owners looking to cover mortgage repayments;
- anyone with regular monthly outgoings such as loan repayments, credit cards, council tax and any other regular bills;
- self-employed people whose income is entirely dependent on them working.
What types of condition are covered?
This varies between various providers. However, most provide cover that includes some of the UK’s most common health problems such as cardiovascular, orthopaedic and psychiatric incapacity.
Even if you think that none of these will ever affect you then it is worth noting the following statistics:
- according to the British Heart foundation, around 2.6 million people suffer from heart disease annually;
- figures from the Chartered Institute of Physiotherapy show that 4.
- 4 million people received physiotherapy on back or neck problems in 2005 – and this figure is rising year on year;
- the NHS states that one in four people will suffer from mental health problems during their lifetime.
Flexibility and choice
Income protection plans are highly flexible and can be structured to meet your exact specifications.
Guaranteed or reviewable premiums – the policyholder can choose to set the premium for the entire duration of the policy (guaranteed rates) or could instead opt for a reviewable rate which will result in a lower initial premium that is likely to increase over time.
Deferred period – this is the period that will need to elapse before the benefit cover can be paid out: the longer the deferred period the cheaper the resulting premium is. For example,many people may have money available saved in a rainy day fund meaning that they could afford to select a slightly longer deferred period.
Conversely, some clients may need the cover to start right away and need a very short deferred period. The policyholder has the option to choose this from the outset of his or her income protection plan.
Policy length – we would recommend that the individual establishes cover so that it lasts until his or her retirement date. This can usually be to any age up to 70. Limited payment term – if you wish to keep costs down as a matter of priority, you can limit your claim period (for example the first five years) which will reduce the premiums you have to pay.
Career break – if your lifestyle or occupation changes it is possible for your cover to do so too. If you opt to take a career break or change your occupation, then you can opt to change the level of cover or to restrict the amount of cover available, thereby potentially reducing the amount of premiums payable.
How much will it cost?
The cost of premiums will depend on a range of factors, including:
- your age;
- sex;
- occupation;
- state of health;
- whether you smoke;
- whether you are involved in “high risk” activities such as abseiling or mountaineering;
- how long you want the policy to last;
- the level of cover and what options you choose.
Conclusion
Can you afford not to protect your and your family’s standard of living should you become unable to work due to a long-term illness or accidental injury?
The following thought may influence your decision on whether you need income protection or not. Statutory sick pay, provided by the State for the first 28 weeks of being signed off from work, is currently £74.50 per week and the long-term basic rate is a mere £84.50 per week.
The question on whether this will be enough to cover you and your family’s needs will depend on the individual circumstances. However, I would hazard to say that for the majority of us it is unlikely to suffice.
- The author can be contacted at: Allchurch Bailey Investment Consultants Ltd, Almswood House, 93 High Street, Evesham WR11 4DU; telephone 01386 442597, e-mail andrew.neale@allchurchbailey.co.uk.
