If you are unable to work due to illness or injury then Income Protection, not to be confused with Critical Illness Cover, pays out a set amount of your monthly income for an agreed period or until you are able to return to work – whichever is sooner. This money can be a vital lifeline, meaning you’ll be able to continue providing for your family and paying the bills while you are out of work, and so it’s important that you get the right policy to suit your needs. So without further adieu let’s walk you through the 7 mistakes to avoid when buying Income Protection!
So, what are some of the things you need to avoid or be aware of when it comes to buying an Income Protection policy?
1. Not Getting ‘Own Occupation’ Cover
When it comes to Income Protection there are 2 main types of cover I like to focus on. One pays out if you are unable to do ANY job at all, whereas the other pays out if you are unable to do YOUR job specifically.
Let me explain…
- Own Occupation – After suffering an illness or injury that is covered by your insurance, you are no longer able to do your job. You make a claim and receive a pay out (normally up to 60% of your pre-tax income) until you are able to return to your job, or until the agreed payment period is up
- Any Occupation – The same thing has happened: you have become ill or injured and are covered under your insurance plan – however you have ‘any occupation’ cover. This means that while your illness or injury might stop you from returning to your previous job, you are still able to do SOME jobs and still perform tasks such as using a keyboard, holding a pen etc and so your insurance doesn’t pay out.
2. Thinking That Critical Illness Cover Would Be Better
Five times more people take out Critical Illness Cover than Income Protection, but this might not always be the best idea. Critical Illness Cover will give you financial support if you were to have a heart attack or cancer for example, but it doesn’t cover a lot of the things that might prevent you from working; such as a bad back or a broken leg, or stress or depression.
3. Not Choosing The Correct Deferred Period
Your deferred period (the time after which your insurance policy will start to pay out), should be for the length of time that you receive sick pay from your employer. Your insurance company will only start paying out once your employer has stopped – so, for example, if you receive 2 months of sick pay, you want your Income Protection pay out to begin after that.
If you decide on a shorter deferred period in order to get your money quicker it’s going to cost you more per month for money that you might not even get because the sick pay payout from your employer is longer.
Of course this only applies if you are in a job where you receive sick pay. If you are self-employed you should pick a deferred period that matches the length of time you can support yourself for.
4. Not Remembering That You Only Get up to 60% Of Your Pre-Taxed Income
As I mentioned earlier, when you make a claim your insurer will pay out up to 60% of your monthly wages, before tax. This means that if you were to take out a policy that would pay out £10,000 a month (which would be an incredibly expensive policy!), but you only earn £1,000 a month, your insurer will only pay out 60% of your actual wage, rather than the £10,000 per month that you have (somehow!) been paying for.
5. Delaying Cover
Even though you would be covered for more years, taking out Income Protection is cheaper if you buy your policy when you are younger. It’s for this reason you should watch out for ‘Age-Costed Policies’. These are similar to low-start Life Insurance policies in that the monthly premiums start cheap and then increase every year as you age.
The increase isn’t as harsh as with low-start Life Insurance, and for those who want Income Protection but are on a tighter budget it can be a viable option. Just make sure you review your policy every couple of years to make sure you’re paying the best price.
6. Don’t Confuse Income Protection With Payment Protection Insurance
It’s easy to get the two confused because they look and sound like similar policies. However…
- PPI plans usually have a maximum pay out period of 12 months and come with a lot of automatic exclusions. They’re also annually renewable, meaning that your insurer has the right to increase your premiums or cancel your cover altogether
- Income Protection can pay out for a much longer period – even up to retirement age if need be, also it’s a fixed contract over a set number of years so the terms of your cover can’t be changed willy-nilly by your insurer. It’s worth knowing though that most pre-existing conditions are excluded – meaning you can’t take a policy out AFTER you’ve been diagnosed with a condition that means you’ll be unable to work.
7. Remember Your Occupation Dictates Your Cover And Premiums
Obviously, because Income Protection covers the income from your current job it’s very important to let the insurer know if you change occupations. In most instances this won’t be a problem as people tend to switch to jobs within the same field. However, if you were to go from a desk job to one in construction for example, your insurer has the right to charge you more or stop your policy altogether.
As with taking out any insurance policy, I would always recommend seeking the advice of a financial advisor before you take out Income Protection. They have access to products from a panel of over 50 lenders, including some that aren’t on price comparison sites, or lesser-known providers, and will be able to help you find a policy that suits your needs.
