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Understanding Income Protection Insurance -

What is income protection insurance? The name has been muddied by companies advertising redundancy/sickness plans and naming them ‘income protection’. There are major differences and it is important that these are understood..

True income protection plans provide an ongoing tax-free income if you are unable to work due to illness or disability. This income continues until you are able to return to work. If your condition is such that you can never return to work then the income will continue until the finishing age chosen at outset – normally your retirement age.

The other type of plan, which is often described as income protection, is more generally known as Payment Protection Insurance (PPI) or Mortgage Payment Protection Insurance (MPPI). These plans typically pay an income for up to 12 months (sometimes 24 months) if unable to work due to ill-health or redundancy. This means that long-term inability to work is not covered and because the plans are renewable annually it means that the cost can be increased – something that has happened during the 2008/09 recession. These plans normally have an ‘any occupation’ definition which restricts your ability to claim unless the debilitating condition is so severe that no occupation is possible.

Why is income protection the most important insurance? Why should it be considered before other types of personal protection? Think about it, as long as you have sufficient ongoing income you can pay the mortgage, the bills and continue to enjoy a quality of life. A continuing income solves most of life’s problems whereas life assurance only pays out once you are dead and then to somebody else.

Some people confuse critical illness insurance with income protection however, whilst it can pay a lump sum or an income, critical illness insurance only kicks in on diagnosis of one of thirty or so named conditions. It doesn’t pay out for broken bones, bad backs or mental health problems whereas income protection could. Interestingly, the majority of income protection claims are for these conditions.

Statistics show that there is a far higher likelihood of being long-term sick than of dying before retirement. Currently there are 2.2 million people who have been off-work for more than 6 months. State benefits are poor, set at no more than subsistence level and totally incapable of providing replacement income for anybody earning more than £10,000 p.a.

What could be more important than protecting ones income? Without income everything else falls apart. Income pays the mortgage, pays the bills, buys the food and enables life, critical illness and pension plans to continue.

Whilst there are web sites which suggest that selecting and buying income protection online is simple nothing could be further from the truth. No two plans are alike and the difference in claim definitions, cost and options is marked. Buying online and then finding out that your plan does not pay when you are unable to work makes a nonsense of the process. Consulting with an independent financial adviser who specialises in this area is the only sure method of buying the right plan for your circumstances.