What is your most important asset? Many people see their home or their car as their most valuable assets and buy insurance policies to protect these assets, but in reality the most valuable asset for most people is their ability to earn an income. Loss of income, for any reason, for a long period of time, has serious implications on our lifestyle and family. Data published by the British Heart foundation shows that there are 7.4 million people living with heart and circulatory diseases in the U.K (April 2019). There are more than 100,000 hospital admissions every year (one in every 5 minutes) due to heart attacks. As per Cancer Research UK, more than 18 million people globally were diagnosed with cancer in 2018. In UK, more than 360,000 people are diagnosed with cancer every year that is nearly 990 people every day. . Department of Transport statistics for year ending June 2018 showed over 26,600 people killed or seriously injured in reported road accidents. Economic surveys have shown that, each year nearly a million people are unable to work due to sickness or injury. Figures released by Association of British Insurers show more than £648 million was paid for Income Protection insurance claims in 2018.
Income Protection insurance is an insurance policy that can replace a part of your income in case you are unable to work due to unemployment / redundancy or accident / sickness. Income protection insurance will enable you to meet your regular expenses like food, mortgage / rent, credit bills during the period you are out of work. If you do not have income protection and out of work for a long period of time, how will you pay for these expenses?
The payout from the policy continues until you start working again or until you retire or until you die or till the end of the policy term, whichever is sooner. There are two types of Income Protection Insurance:-
Policy terms can range from 1 year to the retirement age of the policyholder. The maximum age generally acceptable as a retirement age is 70. Some consumers choose policy terms depending on their other financial obligations like mortgage term.
Anyone, who gets paid for work they do, should consider buying income protection. Self employed should also consider buying income protection because they do not receive any benefit, other than the ones provided by the state, if they are unable to work (and earn). Certain events in life like house purchase, childbirth or any other event, which involves long term financial obligations, make income protection insurance a serious consideration
The amount of cover will depend on your own financial circumstances. Your insurance cover should be sufficient to meet your expenses during the period you do not have any income. Income protection payouts are usually based on a percentage of your income, e.g. 50%, 70% etc. If you choose to insure a higher percentage of your income, your premiums will be higher and vice versa. Therefore, it is important to evaluate what is the minimum cover you require.
You should consider state benefits when buying income protection. Let us first discuss state benefits that you are eligible for, if you are facing temporary unemployment. If you are unemployed but capable of work you may get Jobseeker’s Allowance (JSA). You must be able to demonstrate that, you are actively seeking work in order to get Jobseeker’s Allowance. There are two kinds of Jobseeker’s Allowances – contribution based and income based. You will get contribution based Jobseeker’s Allowance if you have made sufficient contributions to national insurance. You can contribution based Jobseeker’s Allowance only for yourself (not your partner). From April 2019, you will get £ 57.9 / week for contributory Jobseeker Allowance; if you are above 25, you will get £ 73.1 / week. You can get contribution based Jobseeker’s Allowances for a maximum of 6 months, after which, if you are still unemployed (and looking for a job), you may get income based Jobseeker’s Allowance. You can get income based Jobseeker’s Allowance if you have not made sufficient contributions to national insurance. The benefits amount in income based Jobseeker’s allowance will depend on your income, capital and personal circumstances. The rules of calculating your benefits amount is the same as income support, which we will discuss next.
You can get income support if you are on a low income. You need not be available for work to get income support. You can get income support if your capital (savings, property, land) is less than £ 16,000; the home you live in, can be ignored, when assessing your capital. Your weekly income is compared to a fixed weekly level which the Government considers is the amount, known as the ‘applicable amount, you need to live on for Income Support purposes. The difference between the applicable amount and your income is the amount of Income Support payable. The Government can also help you towards the payment of your mortgage interest.
If you are sick and unable to work, you may be eligible for Employment and Support Allowance (ESA). If you are too sick to work, you can get statutory sick pay (£ 88.45 / week) from your employers for a limited period of time (up to 28 weeks), after which you can claim ESA from the Government. To calculate the amount of ESA you will get, the Government adds up your income from different sources and considers what your needs are. To get more information on ESA you should call the Department of Work and Benefits.
While the Government provides the unemployment and sickness benefit to citizens, the benefit amount is usually not sufficient to meet our average day to day living expenses; hence, income protection is a critical financial need. To assess how much cover you will need, you should estimate benefits that you will receive from the Government and your employer if you are unable to work, and buy sufficient income protection insurance to meet all your expenses during the period you do not have any income. You should also factor in the value of other insurance policies, like critical insurance cover and life insurance, when you assess your income protection insurance needs.
The purpose of insurance is to provide financial protection in adverse situations. You should be very clear why you want to buy insurance, how much cover you need and then match the offerings of different products available in the market with your needs. Income protection insurance is relatively more complex than other types of insurance products. The terms used in income protection insurance can also be confusing. You should understand the different product features before buying. We have tried here to explain the broad categories of income protection insurance products and some important features. However, if you want more information on income protection products and their different features, you should consult with an Independent Financial Advisor. You may be able to find an Independent Financial Adviser at http:www.thepfs.org.