Income Protection is designed to replace a percentage of your earnings should you be unable to work as a result of an accident or sickness. Some short-term income protection policies will also offer cover for other events such as unemployment to cover involuntary redundancy if you are employed. If you are self-employed or a business owner cessation of business can insure your earned income should the business stop trading permanently unexpectedly.
Cover Limits - It is important that you ensure that you don't have cover which overlaps over policies and also any employer support. Otherwise you maybe paying for cover you don't need or for a shorter claim excess than required as the claim maybe restricted to the maximum permitted amount when taking into account other benefits from your employer or other policies.
Most insurers limit the amount of income protection cover you may have based around your earned income with the exception of a few specialist policies, which do not check earnings at application or claim stage. Those specialist policies are particularly good for self-employed start-ups with no trading figures or directors with continued dividends/income or those on low earnings wanting to cover more than 70% of their gross income. In most other instances you will need to make sure you say within the permitted cover maximum on the policy you are considering. This may require you to adjust the claim excess also called the waiting or deferment period so that cover starts to pay benefits when any employer has reduced or stops.
The application process
The application process can follow one of two paths "Full Underwriting" at application stage or "Claim Underwriting" only if you make a claim.
Full Underwriting at application stage. i.e. your application is detailed collecting information on your current and past medical health, includes assessment of your occupation and any hazardous sports you participate in, this is always the process for PHI. After the assessment the insurer will either, offer terms as quoted "Standard Terms", offer "Revised Terms" this may include an additional premium and/or exclusions for current or past medical problems or any hazardous sports you do, "Postpone Terms" no cover will be offered for a set period or lastly "Decline" to offer any terms as a result of the information obtained in the application process. The benefit of this is you should not get a nasty surprise when you claim as before the cover starts if you will have been notified of any exclusion(s) on your cover prior to commencement.
Claim Underwriting has the benefit that your application will in most cases follow a simple and quick process to place your policy on risk with little if any initial assessment of your health, occupational or sports risks. Only if you make a claim will the insurer obtain more information regarding your state of health and this is normally obtained from your doctor.
What does it cover?
For accident and sickness insurance what is covered under a policy will depend on the policy wording but you are typically covered for any accident or sickness (Standard exclusions may apply). In particular the policy wording you should consider carefully is the definition of disability that you have been offered under the terms of the policy. Therefore you should not compare just on price as you may except inferior cover terms. The highest protection is obtained by selecting a policy that will pay benefits based on what you do to earn a living in other words "Own Occupation" cover. The main types are:-
Own Occupation - Disability Definition
An important aspect of the plan is that a claim can be considered should
you become unable to do your own occupation. This definition clearly offers
the highest protection as a claim will be paid should you be unable to
do your own occupation. However some income insurance providers only offer
this high definition of cover to those who are in low risk occupations
but we offer own occupation cover for almost all occupations including pilots and those who participate in contact sports or other high risk activities.
Any Occupation - Disability Definition
The plan will only merit a claim should you become unable to carry out
any type of occupation at all.
Any Suitable Occupation - Disability Definition
An important aspect of this plan is that a claim can be considered should
you become unable to do your own occupation or any occupation to which
you are suited, by training or experience. This is clearly preferable
to a definition of disability that requires the inability to carry out
When will it pay out?
With the exception of specialist plans most policies will pay benefits to replace lost earnings. It's the "Waiting Period" or "Excess Period", which you choose at the start of the plan that will determine the period of time you will be required to wait before a claim can be paid. The shortest period a claim can be considered for accident and sickness is after 3 consecutive days absence from work excluding Sundays with the claim being back dated to day one, which is ideal for self-employed or employed when prompt payment is required. Other options for accident and sickness include 1 week, 2 weeks and, 4-weeks, 8 weeks, 13-weeks, 26-weeks, 52-weeks or 104-weeks.
With unemployment insurance the cover waiting period typically offered are 30 days back to day 1, 30 day excess, 60 days back to day 1, 60 day excess, 90 day excess, 120 day excess.
Once you have past the claim waiting period the timing intervals when you may receive the benefit depends on the insurer most pay once a month. However some friendly societies pay benefits weekly direct into your account.
Will the premium rise?
The premiums themselves are not subject to renewal or review by the insurance
company except to the extent that they will rise in proportion to any
rising cover. This is a major advantage. However having guaranteed premiums
will for some be prohibitive as a result of their occupation. As it may
not offer those in manual based jobs own occupation cover.
Premiums are subject to renewal on a regular basis. This means they will increase
as you get older and may also be adjusted to reflect the company's actual claims
Premiums are subject to review on a regular basis. They may therefore be adjusted
to reflect the company's actual claims experience. The contract however, remains
a permanent one and your own age or medical condition will not affect future
Age Costed Premiums
Some providers price your premiums according to your age now so they will
rise every year as you get older and the risk increases. This has significant benefits as it can make this type
of cover more affordable as premiums can be significantly lower than renewable,
reviewable or guaranteed premiums for younger applicants.
Will you still get state support?
Getting financial support if you cannot work will depend on your circumstances such as your household income and savings. Those factors will affect your ability to claim non statutory benefits that are means tested to establish if you need the extra financial assistance on top of any basic state assistance you you may be entitled to no matter what saving or income the household has.
Employee's will be eligible and receive Statutory Sick Pay (SSP) if off work sick for 4 or more days in a row (including non-working days) even if you have personal income protection insurance. SSP is paid for a maximum duration of 28 weeks.
Self-employed are not eligible for SSP and will have to apply for Employment and Support Allowance (ESA) formally called incapacity benefit you can claim this from week 13. ESA consists of two parts, Part 1 is paid if you have made enough National Insurance Contributions. Part 2 is income related and is paid if your on a low income.
More information on state financial support and a calculator can give you an indication of what financial help you may receive can be found at www.entitledto.co.uk.
Taxation during claim
With most income protection insurance the benefits are are paid tax-free. The only exception to this rule is when the cover is taken out and tax relief is obtained on the premiums this could result in the benefit being taxable. Typical examples being employer or director schemes with premiums paid by the company.