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The Full Guide for Income Protection


When your employer promises to cover your illnesses and injuries through sick pay, and you have a health insurance cover that pays for lost income, you feel as if all the uncertainties are sorted. However, they can only cover you for the first few months. What if your illness stretches for longer? Are you comfortable shelling out all your savings?

Well, for protecting your savings from draining out, you can take out an income protection insurance policy. 

Income protection insurance has turned out to be a life-saver for several individuals who found themselves unable to work due to an illness or injury in the past. It pays out enough to cover the utility bills and essentials so that you can focus on recovery. 

If you are still wondering whether paying for this insurance is worth the addition in the financial obligations, here is a complete guide to income protection.

What is Income Protection?

When you meet with an accident or encounter a serious illness, you will possibly not be able to go back to work for the coming months. This means that you will not have enough income to pay for the household expenses. The situation can be worse when you are the sole bread-earner of a family. 

In such cases, income protection insurance will cover a part of your income till you are not able to go back to work or retire. It can pay out as much as two third of your income, enough to meet the essential expenses. All the payouts made under this policy are tax-free.

Income protection insurance covers you when you are out of work because of:

  • A serious illness 
  • An injury
  • Unemployment due to redundancy

You need Income Protection when:

  • You are the sole bread-earner of the family and cannot afford to lose out on regular income.
  • Your employer doesn’t provide you sick pay as your employment benefits.
  • Your savings are not enough to meet your expenses, or you are saving for an expense that cannot be met otherwise, such as buying a house.

Whereas, you can avoid taking one out if:

  • Your spouse and other family members are working and can support the necessary expenses when you are out of work.
  • Your sick pay is enough to support you till recovery when combined with state benefits. 
  • Your have savings that can help you pay your bills. 

In a nutshell, when you have a medium of covering your financial obligations while you are out of work, you can do without income protection. If not, you need income protection for creating a cushion for yourself and your family.

Deferred Period

Deferred period is an indispensible part of Income Protection Insurance as it plays a crucial part in determining your premium. 

When you take out income protection insurance, you will have to account for the time till when your sick pay, state benefits, and savings can cover you. This is because if you ask for the claim as and when you fall out of work, your premium will be high. 

The gap between making the claim from the insurance provider and actually receiving the policy benefits is known as the deferment period. The longer you wait before receiving the payouts, the lesser will the insurance company will charge you as premium. 

Not only the deferred period, there are other factors that affect the amount of premium too, such as:

  1. Age: If you are young at the time of taking out the policy, you are considered less likely to fall prey to an injury or illness that can render you out of work. Therefore, you are charged lesser premium as compared to someone who is older. 
  2. Lifestyle Habits: If you are an avid smoker, have been involved in substance abuse, or have a sedentary lifestyle, you are more likely to encounter severe illnesses. Consequently, you will be charged more premium as compared to someone with an active lifestyle. 
  3. Health: If, at the time of taking out the policy, you have a chronic disease or disorder such as diabetes or cardiovascular issues, your policy is less likely to cover you against these. Even if they do, you will be charged higher premiums. 
  4. Required Cover: While you can ask for a percentage of your current income as cover from your insurance provider, how much you ask for also determines the premium amount. If you ask for a higher cover, the premium will be more. 
  5. Duration of Cover: You can either opt for a short-term income protection or long-term income protection. The longer you are expecting your policy to cover you, the higher will be the premium. 
  6. Deferred period: The longer the deferred period, the lesser will be the premium charged.

How to determine the Cover?

For determining the amount of cover you need, you should first consider the term of the policy, then figure out the percentage of the income you want to get covered.

  • To begin with, you need to decide whether you need a long-term cover or a short-term cover. While a long-term cover will pay-out for your inability to work till you retire or go back to work, the short-term policy will cover you for the coming 12-24 months. In both types of policies you can decide the term. Now, it is up to your power of paying the premium that will help you decide. 
  • Once you are through with the term, you need to make sure that the amount you receive is enough to meet your essential expenses. 

For this, you can create a budget of your expenses and separate out the items that your family cannot manage without. These may be groceries, utility bills, insurance premiums, etc.

Remember, you should continue paying the insurance premiums whether it is for health cover or income protection even when you have made the claim. Otherwise, your policy might expire and you will have to renew it. When renewing the policy, you will be older so the provider can charge more premium from you. 

The Bottom Line

In the end, income protection is not must-have insurance but a cushion against uncertainties. If you want to protect your family from the financial crises which can fall upon them due to your inability to work, you should have income protection. 

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