HOW DOES INCOME PROTECTION WORK?

What is income protection insurance?

Income protection insurance is a type of policy that helps you financially if you can’t work because of illness or injury.

It pays you a regular income, usually a percentage of your salary, if you’re unable to do your job for a significant period.

This insurance is designed to ease the financial burden during times when your health affects your ability to earn an income, ensuring you can still cover your essential expenses like bills, mortgage, or rent.

What are the different types of income protection plans?

There are mainly two types of income protections plans:

• Short-Term Income Protection: These plans provide coverage for a limited time, typically from a few months up to one or two years. They’re designed to offer financial support in the short term if you’re temporarily unable to work.
• Long-Term Income Protection: These policies provide coverage for a longer period, potentially until you retire or are able to return to work. Long-term plans are suitable if you’re seeking protection against prolonged inability to work due to serious health issues.

Both types are designed to replace a portion of your income if illness or injury prevents you from working, but the duration of the coverage and the nature of the benefits can vary significantly between short-term and long-term plans.

Benefits of income protection insurance

Income protection insurance offers several benefits:

• Financial Security: It provides a regular income when you can’t work due to illness or injury, helping you manage your finances and maintain your standard of living.
• Coverage for Bills and Expenses: The payments from the policy can be used to cover essential expenses like mortgage, rent, utilities, and daily living costs.
• Peace of Mind: Knowing you have a safety net in case of health problems reduces stress and allows you to focus on recovery without financial worries.
• Tailored to Your Needs: Policies can often be customised in terms of coverage amount, duration, and waiting periods, fitting different needs and budgets.
• Tax-Free Payments: The income you receive from these policies is usually tax-free, ensuring you get a significant portion of your usual income.
• Support for Recovery: With financial concerns addressed, you can take the necessary time to recover properly without rushing back to work.

These benefits make income protection insurance a valuable tool for safeguarding your financial wellbeing in challenging times.

What does income protection cover?

Income protection insurance typically covers:

• Lost Income Due to Illness or Injury: It provides a replacement income if you are unable to work because of sickness or an accident.
• A Percentage of Your Regular Salary: The policy usually pays out a portion of your usual earnings, often between 50% to 70%.
• Recurring Monthly Expenses: This can include mortgage or rent payments, bills, and other day-to-day living costs.
• Long-Term Security: Depending on the policy, it can cover you for several years or even until retirement age, in case of long-term illness or injury.

The coverage ensures that you can maintain your lifestyle and meet your financial obligations even when you’re unable to earn an income due to health reasons.

What does income protection exclude?

Income protection typically excludes:

• Pre-existing Medical Conditions: Illnesses or injuries you already had before taking out the policy are often not covered.
• Voluntary Unemployment: If you choose to leave your job or are fired for misconduct, you won’t be covered.
• Certain Illnesses or Injuries: Depending on the policy, some specific conditions or injuries might be excluded.
• Drug or Alcohol Abuse: Health issues resulting from substance abuse are usually not covered.
• Criminal Activity or War: Injuries or illnesses due to involvement in criminal acts or war are typically excluded.

Each policy has its own specific exclusions, so it’s important to read the terms carefully to understand what’s not covered.

What are income protection premiums?

Income protection premiums are the regular payments you make to keep your income protection insurance active.

These premiums are calculated based on several factors, including your age, health, occupation, and the level of coverage you choose. The amount and frequency of these payments (monthly or annually, for example) are determined when you take out the policy and can vary from one insurer to another.

Essentially, these premiums are the cost of maintaining your insurance coverage, ensuring you have financial support in case you’re unable to work due to illness or injury.

How much does income protection cost?

The cost of income protection varies widely and depends on several factors:

• Your Age: Generally, the younger you are when you take out the policy, the lower the premiums.
• Health and Lifestyle: Your current health, medical history, and habits like smoking can affect the cost. Healthier individuals usually pay lower premiums.
• Occupation: Jobs with higher risks of injury or illness often lead to higher premiums.
• Coverage Level: The percentage of your salary you want to cover and the policy’s duration influence the cost. Higher coverage levels and longer terms typically increase the price.
• Waiting Period: The length of time before the policy pays out after you stop working (deferred period) also impacts the cost. Longer waiting periods can reduce the premium.
• Type of Policy: Whether the policy is inflation-linked, guaranteed, or reviewable can affect pricing.

The specific combination of these factors means that the cost of income protection can vary significantly from person to person.

How to claim income protection benefits

Claiming income protection benefits typically involves the following steps:

• Notify Your Insurer: As soon as you realise you’re unable to work due to illness or injury, contact your insurance provider to inform them of your situation.
• Complete a Claim Form: Your insurer will provide a claim form, which you need to fill out with details about your condition and how it affects your ability to work.
• Provide Medical Evidence: You’ll need to submit medical documentation from your doctor or specialist confirming your illness or injury and its impact on your work.
• Wait for the Assessment: The insurer will review your claim, which may include assessing your medical information and possibly requesting additional details.
• Adhere to Policy Terms: Ensure you comply with the terms of your policy, such as the deferred period, which is the waiting time before your benefit payments start.
• Receive Payments: Once your claim is approved, you will start receiving regular payments, as defined in your policy, to replace a portion of your income.

It’s important to understand your policy’s specific requirements and follow them closely to ensure a smooth claim process.