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Published on July 22nd, 2013 | by Pete

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Uncovering the value of income protection insurance

Most of us insure our car, home, pets and even our gadgets without thinking too much about it. But how many of us actually insure what is the most important aspect of our lifestyle – our ability to earn an income?

With around 20% of us going on long term sick leave during our working lives, the importance of income protection insurance should not be underestimated. It can prove a financial lifeline if you are forced to rely on state benefits until you return to health.

Put in simple terms, government support will typically amount to around £5,200 a year, which you will need to eke out across the year to pay for your mortgage or rent, food, fuel and other day to day living expenses.And with the average annual UK salary last year being nearly £27,000 (according to The BBC), it is obvious that government support will simply not be enough for the average person. Even those people with a substantial amount of savings could soon see them run dry.

Sick pay schemes

Employee sick pay schemes may or may not cover you, as it depends on how long you have been employed; what the employer’s scheme is, etc. If it does cover you, then, typically it will only do so for up to a certain period of time (perhaps 6 months) and then at a reduced amount (such as half salary).

That is why income protection insurance exists, to provide a replacement income (typically up to 65-70% of your gross salary – this percentage may vary depending on the insurer) in the event that you become unable to work due to prolonged illness.

This tax-free monthly income can be used however you wish to meet your outgoings, leaving you to recuperate free from financial stress.
Previously called Permanent Health Insurance – or PHI – this product is nothing to do with the so-called PPI scandal that has been rife in the press for the last few years, so don’t let that put you off buying it.

The solution

Income protection insurance can be an affordable way to protect your income, offering you two options:
• short term protection which will typically pay out for up to one year (with the option to add on involuntary redundancy cover);
• long term protection which will pay out until you get back to work, or when you retire, whichever happens first. This latter protection does not have an unemployment option.

You can learn more on the Drewberry Insurance website and also use some clever tools which enable you to:
• see how much you can expect to earn until retirement age – then see what the shortfall would be if you became incapacitated during that time;
• see real life stories of how an income protection policy has saved someone financially following an illness which left them unable to work. The information demonstrates how anyone can lose their income, regardless of age, gender or occupation – one insurer’s youngest claimant in 2011 was just 22 years old.
• understand the importance of own occupation cover.

What is own occupation cover?

Typically, there are three definitions used when buying income protection insurance cover – Own, Suited or Any Occupation Income Protection.

• Own occupation: this is the highest level of protection and pays out if you become unable to work in your current role. As an example, a surgeon who loses feeling in his fingers due to illness or injury which therefore prevents him from working in his current position can claim under his ‘own occupation’ income protection policy – even if he is fit enough to do a desk job;

• Suited occupation: this cover pays out if you become unable to do your own job or a similar one that suits your qualifications. An example is a qualified surveyor regularly out on site visits. If he became unable to do this due to illness or injury, but could still do something else in the office that is suited to his qualification level, then the cover will not pay out;

• Any occupation: this policy offers a basic level of protection and pays out if you become too ill to do any kind of paid work whatsoever. So, using the two examples above, if the surgeon or the surveyor were unable to carry out their existing role but could do something else as paid employment such as stack shelves in a supermarket, each one would be expected to do this and would not be able to claim.

The risk of incapacity is very real

Many of us may feel that we are infallible or that even if do we do fall foul to illness or accident, we will soon be back on our feet after a few weeks, and back to work. This is blind faith.

If you are still not convinced of the importance of protecting your income, then the facts speak for themselves:

• figures from the Department for Work and Pensions show that since 2005, the average claim for incapacity benefit stands at nearly three years. Imagine trying to survive on just £5,200 a year government support, for three years;
• research in 2012 from Met Life revealed that 41% of workers have suffered long term ill health or have been made redundant during their working life.

Finding out more about how income protection insurance and how it can protect your you and your family’s financial future in the event of incapacity, may be your next step.

BIO

Tom Conner is Head of Protection at Drewberry Insurance, a London based independent insurance brokerage providing insurance services to individuals and organisations throughout the UK.

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