Protecting Your Income If Things Go Wrong
Do you know your IPI from your IPPI? If you want to protect yourself against loss of income, here's everything you need to know.
I know many Fools aren't convinced that insurance policies which protect your income are really worth it.
These policies are often seen as costly for the cover they provide, and littered with exclusions which allow insurers to wriggle out of paying claims. But I still think protecting against loss of income if you're unable to work is vital. And it's just as important that you understand what you're buying and how you'll be covered.
Trouble is that's sometimes easier said than done. What we need is transparency, but that's in pretty short supply. Take Income Protection Insurance (IPI) and Income Payment Protection Insurance (IPPI) for instance. You could be excused for thinking they are the same thing but, in fact, they are two completely different policies.
True, both are designed to protect your income if you're unable to work. But that's pretty much where the similarity ends. Take a look at the table below which summarises some of the main differences between the two:
Income Protection Insurance versus Income Payment Protection Insurance
Income Protection Insurance
Income Payment Protection Insurance
Also known as...
Permanent Health Insurance PHI
Accident, Sickness & Unemployment insurance ASU
What is covered?
Loss of income as a result of accident or illness
Loss of income as a result of accident, illness or involuntary redundancy
Around 50% to 65% of income (there may be an upper limit on the level of salary covered)
Around 50% to 65% of income usually up to a maximum benefit of £1K to £2K a month
How long are you covered for?
Until you're able to return to work or you retire if you're never able to return to work
Up to 12 months (sometimes 24 months). Cover stops when you return to work.
Is there a waiting period before you start receiving benefits?
Normally you can choose from a choice of deferment periods from day one to 52 weeks. The longer you wait, the cheaper the policy.
A waiting period of 30 or 60 days is typical. Some policies will backdate benefits to day one.
As you can see, IPI offers the potential for replacing a proportion of your income over the long-term if required. If you become unwell or suffer an injury that's so severe you're never capable of returning to work, the payout from this type of policy will continue until you reach normal retirement age.
However, IPI policies vary greatly depending on how much cover you want and how much you want to spend. As I mentioned in the table above, if you choose a short deferment period your premium will be higher. Day one cover provides a replacement income straightaway, but of course this can be expensive. If you can afford to wait for a while -- 13 weeks is a pretty common deferment period -- your premiums will be considerably lower.
Most IPI policies will cover you if you're unable to do your own job. However, you can make the premiums cheaper by setting up a policy which will payout if you can't do any job. But this means while you may not be capable of doing your own job, the policy won't pay out an income unless you are unable to work in any capacity. This option might not provide cover which is comprehensive enough for you.
You could, instead, go for the middle ground by choosing a policy which covers you if you're unable to do any occupation which is suitable for you given your experience, training and qualifications.
IPPI, on the other hand, will only normally pay out benefits for 12 months even if you haven't recovered sufficiently to return to work, or you're unable to find employment following redundancy.
These policies are becoming very popular at the moment despite the short term nature of the protection on offer. This is simply because a growing number of people are becoming concerned about job safety with the threat of recession still looming.
Remember a claim will only be successful under IPPI if you have been made redundant involuntarily. If you choose voluntary redundancy, you resign or you're dismissed, you won't be covered. Be extra careful if you know redundancy is impending when you take the policy out. You risk your claim being rejected later on if you don't declare it upfront.
So you can see there are some fundamental differences between IPI and IPPI and the type of protection they each provide.
Exclusions, exclusions, exclusions
This is one thing that does apply to both policies. You must check out the terms and conditions so you understand exactly what is covered and any exclusions which apply.
It may be difficult to get cover where you have a pre-existing medical condition. Here it's likely the condition will be specifically excluded by the policy. Don't be tempted not to declare your full medical history when you apply, because this could well come back to haunt you later on. A claim made for a pre-existing medical condition will almost certainly be turned down.
On a final note, it's important you have some cover to replace your income if you're unable to work for a time. Statutory Sick Pay provides a weekly payment of just £75.40 per week so relying on benefits alone is probably the greatest mistake of all.