Each year, people find themselves unable to work due to a serious illness or injury. Statistically speaking, you can find yourself in this situation, and you won’t be able to earn income. Do you have enough savings to cover your bills and daily expenses? Would your sick pay help you get through those difficult times? If not, you might want to consider buying income protection insurance.
Keep on reading to find out everything you need to know about it!
Income Protection Insurance: what is it and how does it work?
Income protection insurance is a type of policy that pays out if for any medical reason – physical or mental, illness or injury – you’re unable to work. The idea behind it is to protect your financial situation in a longer-term way than sick pay would. People claim their income protection for reasons like depression, chronic back pain, or accident-related injuries, but also because of strokes, heart attack, or cancer. These medical conditions are quite common in the population.
How exactly does it work? Upon buying an income protection policy, you agree to pay a monthly fee (your insurance “premium”). In return, if you need to claim, you receive a tax-free monthly payment (known as the “benefit”). However, before you start collecting your monthly benefit, you have to go through a “waiting period” or a “deferred period.” This means that you’ll start receiving your monthly payments after an agreed time, and not right after you become unable to work. Typical waiting periods range from 1, 4, 8, 13, 26, or 52 weeks.
Cost and payback
Your monthly premiums will vary according to several factors. To buy your income protection policy, you need to decide on things such as the benefit amount (how much your monthly payments would be), the benefit period (how long you’d be paid your monthly benefit for), the policy term (how long would you be insured for), the policy and premium types (how the benefit amount and premiums change over time), and the waiting period. Your age, job, health, lifestyle, and even smoking status and family health history will be taken into account as well.
Income protection insurance can potentially replace up to 75% of your income, depending on the factors mentioned above. It can make a huge difference for you if an illness or injury prevents you from working.
Benefits of income protection insurance
Without a doubt, this type of insurance can help you maintain financial stability when you find yourself unable to work. Even though you won’t be able to earn money for some time, you’ll still be able to stay on top of the bills and debt.
Many people have mortgages and other loans to pay. If you’re in this situation as well, with your monthly payments, you’ll be able to keep paying them off. Sometimes, if the recovery requires expensive treatment, it can contribute to the accumulation of your debt.
Income protection insurance helps you manage all your bills. It can also help you maintain your current living standard, help you focus on your recovery process, and provide reassurance to your family. For many people, that peace of mind makes this type of insurance worth it.
When should you think about buying income protection?
Two main situations can encourage you to start thinking about this type of insurance.
The first one is when you have children and other financial dependents who rely on your income. If your earnings are missing due to medical reasons, you could be at risk of not keeping up with all of your financial obligations.
The second one is when you become self-employed or start contract work. These types of employment usually mean that you won’t receive sick pay.
Thus, a long time off work can significantly destabilize your financial situation. Income protection insurance will be your safety net that can lessen the negative impact.
Income protection vs. other types of insurance
If you find yourself unable to work, you’ll probably expect to receive sick pay first. However, sick pay is usually limited to a set number of weeks and may not be enough for you to keep on top of the bills. With income protection insurance, you’ll be paid for at least a year (in case of a short-term policy), or even longer, depending on the type of policy you buy.
You may also have critical illness cover. Now, this type of policy only pays out if you’re diagnosed with a specific illness listed in your policy, and protects you and your dependents from financial consequences of this diagnosis. Income protection insurance covers any mental or physical illness or injury that prevents you from working. It also protects a part of your income so you and your dependents can keep up with your financial obligations.
Taking out income protection insurance is a personal decision. However, if you can identify with some of the aspects mentioned in this article, this may be a sign that you can benefit from it. It can undoubtedly bring you peace of mind when you need it the most.