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Home / Expert Guides / Income Protection Guide

What is Income Protection Insurance?

What is income protection insurance and why should you take out a policy to protect your monthly wage? Income protection insurance provides you with a pay out if you’re unable to work due to illness or injury, and continues to do so until retirement, death or you can return to work. There are short and long-term policies, depending on your needs and budget, providing you with a way to maintain your lifestyle while you recover. 

This type of policy differs from similar insurance products, such as critical illness or life insurance policies. There are various factors to consider when choosing an income protection policy, and it’s important to take your requirements into account to ensure you get the right level of cover. 

In our income protection insurance guide, we outline everything you need to know about this type of cover, from determining how much cover you need to the differences between individual and group insurance, and how income protection insurance works.

Contents

Getting Income Protection insurance during Coronavirus 

How does the pandemic affect your ability to get income protection insurance and would coronavirus be covered? We answer the most common questions in the first section of our income protection insurance guide. 

How much Income Protection cover do I need?

Finding the right balance between being under-insured and paying more than you need each month can be difficult. We explain what you need to consider when choosing the level of cover that’s right for you. 

How much is Income Protection insurance?

How much does income protection cost and what impacts the price? We highlight the different factors that affect how much you’ll pay for insurance and how to save money. 

What is group Income Protection insurance?

Group income protection insurance, or GIP, is designed to provide an income to an employee when they can’t work due to illness or a severe injury. It’s a business insurance scheme that employers may offer as part of a benefits package. Here, we outline what a GIP is and its advantages. 

Why you need Income Protection insurance for a mortgage

A mortgage is a big financial commitment. Income protection insurance ensures that your mortgage is paid, even if you’re unable to work. In this section of the guide, we explain more about why this level of cover is necessary and the benefits it can offer. 

How long does Income Protection insurance last?

Does income protection insurance have an expiration date? It depends on the type of policy you choose. We explain how long each of the different policies last in this section of the income insurance guide. 

What are the benefits of Income Protection insurance?

How might income protection insurance benefit you if you take out a policy? In the final section of our insurance guide, we explain some of the most common benefits to choosing an income protection policy to offer peace of mind if you’re unable to work. 

Getting Income Protection Insurance during Coronavirus

Thankfully, most people who contract coronavirus recover quickly. Since most income protection policies have a minimum claim period of 30 days, you wouldn’t be eligible to make a claim as a result of being off work due to COVID-19. 

For those who have recently taken out income protection, the policy should pay out if you didn’t have coronavirus when you applied and your application was otherwise successful. However, if you did have coronavirus when you took out the policy, it would be deemed a pre-existing condition and wouldn’t be covered. 

Due to the outbreak of COVID-19, some insurers are not offering new insurance policies at this time, while others are reviewing each case on an individual basis, with the potential for exclusions related to COVID-19. 

1: How Much Income Protection Insurance Do I Need?

It can be difficult knowing how much income protection cover to take out, as you don’t want to underestimate your needs simply to keep the premiums low. But over-insuring unnecessarily can just be a waste of money each month. So, it’s understandable that a common question relating to this type of insurance is ‘how much income protection cover do I need?’.

Consider how much you need each month in order to remain comfortable, so that you purchase the right level of cover. If you’re choosing long-term income protection, rather than short-term insurance related to a specific debt, consider all of your essential outgoings that will need to be paid for such as council tax, utility bills and food costs. 

Remember that some outgoings you’d normally have such as commuting to work and work-related expenses won’t be an issue while you’re not working, so these can be removed from your expenses. 

Bear in mind that an income protection policy can’t put you in a better financial position than you’re in when working, so insurers typically limit the percentage of your gross annual income in terms of what they will cover. But you might require less cover than the maximum your insurer will provide if your outgoings are lower than this, so understanding what your essential outgoings are is key. 

2: How Much Does Income Protection Insurance Cost?

So, how much is income protection insurance? The answer actually varies, depending on the policy you choose and your individual circumstances. Different insurance providers will offer their own policies which will vary in price. 

Different levels of policy will affect the price you pay, as will making sure you only take out the level of cover you actually need. 

The cost of your policy is impacted by:

  • Age
  • Job
  • Whether you smoke or used to smoke
  • How much income you would like to cover
  • The waiting period before the policy pays out
  • How many illnesses and injuries are covered by the policy
  • Current health status, such as your family medical history and your weight

When it comes to how to get the cheapest income protection insurance, there are ways to affect the price, such as the range of illnesses or injuries covered by your policy, and quitting smoking. There are ways to reduce your monthly premiums, such as:

  • Taking stock of your essential expenses and areas where you could save yourself excess cover by cutting certain expenses that aren’t necessary
  • Extending the deferment period (the amount of time you’ll need to wait before receiving payments). If you have savings you can use in the interim period, this could save you money on monthly premiums
  • Making lifestyle changes that will reduce your premiums, which some insurers offer incentives for, such as taking part in regular exercise, losing weight and attending medical check-ups regularly. Some will also reduce premiums if you give up smoking for at least 12 months
  • Paying level premiums instead of stepped premiums which get higher over time, which can save you money over the course of your policy but might mean a higher initial premium

3: What is Group Income Protection Insurance?

When you’re researching income protection cover, you may come across the term group income protection. But what is group income protection and who benefits from this type of cover? 

Also known as GIP, group income protection is a popular workplace benefit that employers offer to staff as part of a benefits package. This group income protection scheme is set up to provide staff with an income in the event that an employee is unable to work due to an injury or poor health. GIP provides the employee an income to make up any lost earnings for the period they can’t work. 

If a group income protection plan pays an employee, the payment typically starts following a deferment period of around 6 months. From then, the payments would continue until the employee could return to work or they reach pension age, depending on the terms of the policy. This policy is owned and paid for by the company and payment goes through PAYE as it forms part of the employee’s salary.

There are eligibility conditions which have to be met, which are agreed with the insurance provider, and may include:

  • Minimum and maximum entry ages
  • Categories of members who are covered by the policy
  • When new entrants are entitled to enter the policy
  • When existing members can increase their benefits

Sometimes, the scheme may pay out a lump sum settlement, although most group income protection policies are designed to pay out monthly for the duration that the employee is unable to return to work. This type of payout is usually considered on a case by case basis and will depend on the specific situation. 

4: Why You Need Income Protection for a Mortgage

Income protection for mortgage loans is a separate type of insurance product which protects you from financial difficulty in repaying your mortgage if you’re unable to work. Some lenders require income protection for mortgage application purposes, but this varies depending on the individual lender and their terms. But why do you need income protection insurance for a mortgage? 

Both income protection insurance and mortgage payment protection insurance, or MPPI, are designed to help you pay your bills if you can’t work due to illness or injury. There are different types of policy for this purpose and the costs and terms of each one varies significantly. 

While income protection is designed to replace a portion of your income if you can’t work, MPPI covers your loan repayments for a set period, usually up to 2 years, if you lose your job or have an accident or illness that leaves you unable to return to work. 

Income protection insurance is available as a long-term policy to cover you until you reach retirement, as well as a short-term policy which covers you for a set period of time and is often cheaper as a result. 

With your mortgage such a large proportion of your monthly outgoings, it’s important to have financial protection if anything affects your earnings. Income protection insurance ensures that your mortgage will be repaid each month and that your home will be secure while you recover. 

5: How Long Does Income Protection Insurance Last?

When you take out an income protection policy, you will be asked to set a deferral period, which is usually between 1 and 12 months, after which it will pay out. But how long does income protection insurance last for? 

There are several answers to this question. You can choose if your policy ends when you retire or at a set age. Since you are no longer working after retirement, this is a common option that many people choose.

Your income protection policy will also end if you pass away. But does income protection insurance expire? Your policy will last until you’re able to return to work and continue earning a wage, which may be after 2 years or longer, depending on what is preventing you from working. 

If you will be out of work for longer than the sick pay policy will pay out for, but not enough for long-term protection, there are short-term policies that will last for up to 2 years and are cheaper than a standard income protection policy. 

6: What are the Benefits of Income Protection Insurance?

Why get income protection insurance and what can it offer you? There are several benefits of income protection insurance, especially for people taking out a mortgage or those with dependents who rely on their income. Accidents can happen to anyone and we are all at risk of developing an illness that could leave us unable to return to work for a long period of time. 

One of the main benefits of income protection is that it enables you to continue paying your bills if you are unable to work, so you can maintain your lifestyle while you recover. Income protection cover can provide you with peace of mind that the following bills will still be paid each month: 

  • Mortgage or rent payments
  • Utility bills and groceries
  • Childcare costs
  • Car loans or credit agreements
  • Adaptations to your home to accommodate your illness or injury

With only a small number of employers offering support for staff for over a year if they’re off sick from work, income protection is something that can benefit anyone of working age. It’s a policy that can help you maintain your standard of living, not just for yourself but also your family, helping to pay towards hobbies, school trips and clothes for your children and other lifestyle expenses that would be impossible to pay for without your regular income.

Income protection insurance pays out until you can return to work, until you retire, pass away or when the policy term comes to an end, whichever is sooner. It covers most illnesses which would leave you unable to work and you can claim as many times as you need to while your policy lasts. 

This type of insurance can be particularly beneficial if you:

  • Don’t have much in the way of savings and would struggle to make them last to cover you if you couldn’t work
  • Have a family or dependents who rely on your income each month
  • Have debts which you would struggle to repay without a regular income

Find Out More

Choosing the right policy to protect you against financial difficulty if you’re unable to work can be a daunting task, but Town & Country Mortgage Services can help. We have an experienced team of insurance experts who can offer advice and guidance when it comes to choosing an insurance provider that best suits your needs. Get in touch with us today for further information. 

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