Income Protection Insurance
Similar in its design to critical illness cover, income protection insurance provides a regular periodical pay out to substitute an income if the policyholder is prevented from working due to suffering from an accident or illness or other accepted reason. This insurance is designed to ensure the holder does not suffer from a significant fall in income if they are prevented from earning their usual wage.
Income protection insurance can be confused with payment protection insurance. However, the latter covers the cost of repayments on a specific loan, while income protection insurance offers a replacement to the customer's lost income from incapacity. Income protection insurance should also not be confused with accidental sickness and unemployment (ASU) cover. ASU, like payment protection insurance, is designed to cover the cost of a mortgage or rent with a small addition for bills. It does not provide a replacement for an income.
At this point it should also be noted that not all policies pay out if a customer is only prevented from doing their chosen job. If a policyholder is capable of working in some capacity, some income protection insurance policies will not pay out. To avoid this situation customers should ensure that their policy pays on the basis of prevention from doing their chosen work.
Premiums for income protection insurance are calculated based on the policyholder's wage at the time the cover is taken and on the level of pay out selected. Policies typically offer cover of up to 65% of the policyholder's wage. However, coverage for a lesser percentage of the customer's salary would command a lower premium.
Income protection insurance is applicable to customers from any employment background, but is of significant relevance to the self employed, who are unlikely to be eligible for incapacity or accident payments from an employer. However, income protection insurance policies can also be taken to supplement workplace cover. Most employment based sick pay has a limited time span, so income protection insurance can be taken out to provide a replacement income once the workplace facility has run out (typically after 6 months).
Policy terms for income protection insurance can vary tremendously and naturally the premium cost is related to the length of the policy term. Protection can be taken from a period of a matter of months up to retirement age, in which case the income protection policy will pay the agreed sum up until the policyholder takes official retirement (as long as the policyholder cannot return to work). State benefits can be claimed alongside income protection insurance and the pay outs from the policy are not taxable.
Income protection insurance can be taken out by individuals or in a group setting by companies or organisations. Group income protection insurance offers the same coverage that individual policies provide (i.e. income replacement for the individual), however these insurance products also help the company to mitigate the costs of replacing the departed employee. Policies can pay contributions towards replacement staff costs, and to cover National Insurance and pension contribution commitments.
Similar insurance products that essentially provide the same type of coverage as income protection insurance include permanent health insurance, income replacement insurance, and long-term disability insurance.
Like other insurance products, income protection insurance providers offer fixed premiums for the duration of the policy term and variable premiums that change from year to year in line with the customer's changing circumstances.