Income Protection

Without being able to work because of an illness or injury, you’re more than likely going to struggle to pay your bills and living expenses. This is especially the case when you have loved ones who depend on you financially. Income protection insurance provides you with regular payments when you’re suffering from a loss of earnings to cover your outgoings, such as your mortgage payments.

At Trinity Finance, we understand how important it is for you and your loved ones to be financially protected when situations are out of your control. Our mortgage and protection consultants are highly experienced in ensuring the right type of insurance is in place to meet your needs, whether you’re looking for short-term protection or prefer the peace of mind gained by having longer-term protection. In this guide, we’ll explain what income protection insurance is, how it works, the types of cover available and issues to think about before proceeding with your policy.

What is income protection insurance?

If you’re unable to work as a result of illness or an injury, income protection insurance provides you with tax-free monthly payments to replace some of the income that you’d normally earn. This gives you essential financial support so that you can still pay your mortgage and other monthly bills. With this financial safety net in place, you can benefit from security and peace of mind, allowing you to concentrate on your recovery should the unexpected happen.

How does income protection insurance work?

With this type of insurance, you receive a proportion of your salary – usually between 50% and 70% – in monthly instalments while you’re unable to work. Depending on the cover you choose, the payments are either made for a set period, until you return to work, the policy term ends, you retire or you pass away. You can claim as many times as needed during the policy term, unlike critical illness cover where you can only claim once and then the policy ends.

The payouts for an income protection policy are not made to you straight away when you have to stop working. There is an initial pre-agreed waiting period, such as 8 or 13 weeks, but this can be as soon as 4 weeks after you stop working or as long as 2 years. This is because income protection cover is ideally designed to pay out after your other financial backup has ended, such as the sick pay benefits from your employer. That way, you benefit from the new financial support once your other reserves have run out. The longer you agree to wait before receiving any payments, the cheaper your premiums are. If you have savings that can tide you over, for example, deferring the payments for a longer period can help reduce your income protection premiums.

Short-term vs long-term protection

You can choose between short-term and long-term income protection depending on the type of cover you prefer and how long you’d like to be covered for, which is called the policy term.

• Short-term income protection: You receive payments for a short term, such as 6 months to a year, although some short-term policies pay out for up to 2 years. As the cover is for a shorter term, it is usually cheaper than long-term income protection cover. A type of short-term income protection insurance is called accident, sickness and unemployment (ASU) cover. This covers you in the event that you cannot work due to illness, injury or involuntary redundancy.
• Long-term income protection: This provides cover against illness or injury but doesn’t cover you for unemployment. Long-term cover ensures you receive a monthly payment until you return to work, the policy ends, you retire or you pass away.

Fixed increase, index-linked increase or stepped-benefit cover

There are different options available for the payments you receive, depending on the insurance provider and the type of policy you choose.

• Fixed increase: With this type of cover, the payouts from the insurer increase by a set amount each year. The cost of your premiums also increases annually to reflect this.
• Index-linked: The payouts increase each year in line with inflation. This ensures you benefit from the amounts in real terms. Your premiums also increase annually and this is usually at a rate that’s slightly higher than inflation.
• Stepped-benefit: You can choose to receive two levels of payouts made at different times. For example, your employer may initially pay you the full amount of sick pay. While receiving this, you can opt to receive lower income protection payments from the insurer. When your employer reduces the sick pay benefits paid to you, you can receive higher payments from the insurer.

Types of income protection

There are various types of cover available so it’s important to choose the right one to suit your needs.

• Accident and sickness: This provides cover if you’re prevented from working due to illness or injury.
• Unemployment: This form of income protection covers you in the event that you’re made involuntarily redundant.
• Accident, sickness and unemployment (ASU): As a combination of the two types of cover above, this provides cover if you’re unable to work because of illness, injury or involuntary redundancy.

Levels of income protection cover

There are three main levels of income protection cover to choose from: own occupation, suited occupation and any occupation. These determine whether the insurer will pay out based on your work situation.

• Own occupation: If you’re unable to do your own job at the point you make a claim, you will receive payouts from the insurer. This provides you with the highest degree of cover and, as such, the premiums are more expensive.
• Suited occupation: The insurer will pay out if you’re unable to do your own job or a similar one that’s suited to your credentials and experience. If work is available that the insurer deems suitable for you, no payouts will be made.
• Any occupation: If you’re unable to work at all because of illness or an injury, you will receive payments from the insurer. This is the cheapest option but there’s more risk of having an unsuccessful claim with this level of cover.

As well as receiving the full income protection we’ve mentioned so far – in the form of monthly payments equating to a percentage of your salary until you return to work, retire or pass away – partial income protection is also available. You may be able to return to work but have to work fewer hours as a result of your illness or injury. Instead of the insurer simply stopping your normal monthly payments when you’re back at work, they may continue them but reduce the amount to compensate for your reduced hours and earnings. When your earnings go back up to the level they were before, the payouts will stop.

What else is included with income protection insurance?

Unlike critical illness insurance, which covers specific serious illnesses, income protection insurance covers most illnesses that render you incapable of working. It also covers you for most types of injuries when you’re prevented from working and, with some types of cover, when you’ve been made involuntarily redundant.

As well as these types of cover, different benefits are offered depending on the insurance provider and the type of cover you choose. For example, as mentioned above, the payouts can still continue when you return to work. Some policies allow for payouts to be made when you’re hospitalised, even if this happens before the end of the pre-agreed waiting period. Other policies allow for a waiver of premiums whereby the insurer covers your premiums during a successful claim. If you’ve already made a claim and are unable to work again due to illness or injury within 12 months, some insurers waive the normal waiting period so that there’s no delay before receiving any payouts. Another benefit is that many income protection policies are provided with life insurance.

Our mortgage and protection consultants – located in Kent, London and Edinburgh – are available to discuss the various aspects of income protection insurance in a jargon-free manner and provide you with impartial advice. This makes it easier to break down the choices you need to make for the type, level and length of cover you prefer as well as the options relating to your premiums and the payouts you’ll receive in the event of a claim. Just give us a call on 01322 907 000 to get started and discover the additional benefits you can take advantage of with the income protection plan you opt for. If it’s out of office hours, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form and one of our protection specialists will reply to you with more information as quickly as possible.

Are you eligible for an income protection policy?

The eligibility criteria differ between providers but you usually have to work for a minimum number of hours per week, whether you’re employed or self-employed. You’ll also need to answer questions about your health, including whether you have any pre-existing conditions, and your family’s medical history as well as your lifestyle, such as whether you smoke or take part in high-risk activities.

Do you need income protection insurance?

Income protection can be an invaluable lifeline if you’re suddenly unable to work and don’t have much in the way of a financial backup. To work out whether you need it or not, think about what financial help is at your disposal and how long it can last for when covering all of your bills and normal living expenses. For example, you may have savings but consider how long they could tide you over for when using them to pay your mortgage, utility bills, food shopping and other costs.

You may be eligible to receive Statutory Sick Pay (SSP) but it’s a limited amount of approximately £100 per week, which won’t stretch very far if you have a large loan, such as your mortgage, to pay. SSP is paid by your employer and, depending on your eligibility, you can receive it for up to 28 weeks. You may benefit from a separate sick pay scheme at work — check with your employer as to how long this covers you for.

Before proceeding with an income protection policy, check that you don’t already have this type of cover. It may have been included as a benefit as part of your work contract or as an extra when you took out your mortgage, such as combined life insurance and income protection cover. It’s not a legal requirement to take out income protection insurance when you have a mortgage but it’s a good way to ensure you can make your mortgage payments should you be unable to work for an extended period.

How much does income protection insurance cost?

The amount you pay for your income protection insurance depends on your personal circumstances and the policy you opt for. Usually, insurers take into account your age, the type of job you do, your health, your lifestyle, the level of cover you prefer, how long you wish the pre-agreed waiting period to be and what percentage of your income you’d like to be covered.

As mentioned above, your age is one factor and, generally, the younger you are when you take out the policy, the cheaper your premiums are. Your job is another factor and if the insurer considers it to be risky, you can expect to pay higher premiums. You’ll also be asked questions about your health and your family’s medical history. If you’re in poor health, are a smoker or have pre-existing conditions, you’re likely to pay more than if you’re in good health. If you have a pre-existing condition, you have increased vulnerability so your premiums are likely to be higher. Some insurers may exclude that condition from the policy so you need to check what’s included and what’s not very carefully. Your lifestyle is another factor that can affect the cost. If you enjoy taking part in high-risk activities, for example, this can increase the premiums.

Other aspects that affect the cost of your policy are the financial amount of cover you require, how long the pre-agreed waiting period is and the level of cover needed. You can also choose between guaranteed and reviewable premiums.

Guaranteed vs reviewable premiums

Guaranteed premiums stay the same during the policy term unless you amend your policy at some point. This helps with budgeting and gives you peace of mind that the amounts you pay will always be the same. When your policy has reviewable premiums, they can change when periodically reviewed by the insurer. This means that although your premiums may be cheaper initially, they may increase significantly over time.

Considerations before taking out income protection insurance

Compare the cover provided by income protection insurance with other forms of insurance to ensure you benefit from the right financial protection for your circumstances and needs. Critical illness insurance, for example, is cheaper but only covers you for specific illnesses. It provides you with a lump sum payment rather than the monthly payouts you receive for an income protection claim so you need to think about which type is more beneficial to you. An income protection policy doesn’t provide cover if you pass away. For your loved ones to receive financial help after you die, you need a life insurance policy. It’s worth thinking about combining different forms of protection as this may be cheaper than buying them individually.

It’s important to be honest about your medical history when applying for your income protection insurance. If you fail to disclose relevant information, the insurer may refuse to make any payouts in the event of a claim. Before proceeding with a policy, make sure you understand everything that it covers, if there are any restrictions and whether there are any exclusions. If, for example, you have a pre-existing condition and an insurer won’t provide cover for this, our mortgage and protection consultants can approach other providers to include this cover for you.

Insurers assess the risk factors of jobs differently so check which risk category your occupation falls into to make sure that you’re not paying a higher premium for this than you need to. Once you have a policy in place, you need to notify the provider if you change your job. Although you can keep the same policy, your premiums may increase or decrease if the insurer feels the level of risk in your job has changed.

Can you cancel your income protection policy?

Generally, insurance providers give you a period of 30 days to cancel your policy and receive a refund. After that, you won’t be refunded for any premiums paid if you decide to cancel it. You can usually amend your policy, whether you wish to increase your level of cover or prefer to decrease it, so it’s best to speak with one of our mortgage and protection consultants about this first. If you decide to cancel your policy and then take out another one at a later date, it may be more expensive as you’ll be older at that point and may possibly have experienced health issues in the meantime.

Benefit from a financial safeguard with income protection insurance

Whether you’re employed or self-employed, income protection insurance provides financial security for the future should an illness or injury prevent you from working. At Trinity Finance, we make this somewhat complex insurance easy to understand so that you can choose the exact cover you need to suit your circumstances.

For peace of mind that you can maintain your lifestyle despite a loss of earnings, give us a call on 01322 907 000. Our mortgage and protection consultants – located throughout Kent, London and Edinburgh – are ready to tailor your income protection cover and provide you with impartial advice on the other types of financial protection available. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our protection experts will reply to you with more information before helping you to put the best income protection insurance policy in place.