Five reasons to consider income protection

Life insurance is the most commonly bought form of financial protection in the UK, but many people aren’t aware of other types of cover available, such as critical illness and income protection, which could be more relevant for your needs.

Life cover is of course an essential part of protecting your family financially but have you considered what would happen to your finances if you were unable to work long term or suffered a serious illness? How would you pay for the everyday bills and keep the family finances afloat?

Income Protection is a policy that pays out a monthly tax free income if you are unable to work due to accident or ill health, with people most commonly claiming because of stress/mental health related conditions, back problems and cancer.

Critical illness cover will pay out a lump sum if you suffer one of the conditions covered under the plan. The most common reasons for claims are for cancer, heart attacks and strokes.

Here we look at five reasons why you should consider critical illness and income protection cover.

1. It’s more likely to happen.

Statistically you are much more likely to suffer an illness that prevents you from working than you are to die within your working life. According to insurer LV=, you have a one in 12 chance of passing away during your working life, versus a one in five chance of being unable to work for more than three months or suffering a serious illness.

2. It’s not as expensive as you think.

People vastly over estimate the cost of protection insurance. Recent research from The Protection Review found that people believed they would need to pay around £50 a month for cover. In reality, if you are in relatively good health an income protection or critical illness policy premium is likely to be around half of that per month, or even cheaper if you take out cover young.

There are also different options that you can choose from to fit cover to your budget. Some income protection policies pay out until retirement age, while others pay short term for one or two years. These shorter term policies can also cover you for unemployment.

There are also different levels of critical illness cover from high end policies with all the bells and whistles, to core cover for the most claimed on conditions.

3. Children are covered under your policy.

No-one likes to imagine that their child could be seriously ill, but if the worst did happen it can have a huge financial as well as emotional impact on the family.

Most critical illness policies also cover children as standard, paying out a percentage of the overall sum assured if you make a claim. This can help ease the financial burden if you need to take significant time away from work to look after your child. Some policies even pay out double for children’s claims if both parents are covered.

4. The State won’t look after you.

Many people expect that the State will look after them if they are unable to work. The reality is that in recent years the State has been moving away from a position of providing generous benefits for those unable to earn an income, and moving to a position where it is essential for people to provide their own financial safety net.

The Government’s replacement of incapacity benefit with the more difficult to claim on employment support allowance pays out less than £100 per week – is that something that you could live on long-term?

Employers also only pay sick pay for a defined period of time, and many people have no idea what they are entitled to. Sound financial planning should involve knowing which benefits are available to you and what gaps you need to fill with personal insurance.

The longer you receive sick pay from your employer, or could survive financially, the longer you can defer a payment from an income protection policy claim kicking in, which makes the monthly premiums cheaper.

5. You don’t have to be employed to take out cover.

You don’t have to be in employment to take out income protection or critical illness cover. If you are self-employed or a house person you can also protect yourself against the financial impact of ill health.

For those who are self-employed, financial protection is arguably of even greater importance as you do not have employee benefits to fall back on. Critical illness cover is no different if you are employed of self-employed.

For income protection cover, an insurer will assess your average earnings over a period of between 12 and 36 months, and a tax-free monthly benefit is based on a percentage of this. On average, you can insure yourself for between 50-65% of your pre-tax income including dividends.

If you are a house person, many do not consider the financial impact of being unable to carry on with your day to day duties. Childcare in particular is a large expense that would need to be covered if the main carer was no longer able to do so. If there is only one wage earner then the other parent is unlikely to be able to give up work to take over these duties. A critical illness policy or a house person’s income protection can be set up to cover this risk.

As with all financial protection, there are many options available and no one insurer or type of policy will be right for everyone. It is essential to seek specialist advice to ensure you are getting the most suitable cover for your needs.