Let's Talk Income Protection

Income protection is an insurance product that is designed to replace lost income as a result of illness or injury.

The policy provides a monthly sum for the duration of incapacity or maximum product term, whichever is sooner, and the monthly benefits are paid tax-free. Maximum cover amounts will be restricted to a portion of your gross annual salary, this is most commonly around two thirds. Multiple claims can usually be made across the term of the policy, though you may be required to return to work for a set period between claims.

The first step to building an income protection policy is discussing your income and outgoings to establish any shortfall that would arise from a prolonged period off work. You will also select a policy term, for example retirement age or the term of your outstanding mortgage.

Once you have selected a policy term, you will then choose between short and long term cover. Short term products most commonly pay out for a maximum of 1 or 2 years, at which point you will be required to return to work for a set period before subsequent claims can be made. Long term cover is more expensive as this will pay out from the end of your deferred period to the end of your policy term or return to work.

The deferred period is the amount of time you wait between making a claim and receiving your first monthly benefit amount. For example, if you choose a deferred period of 8 weeks, the monthly benefit will kick in from week 9. Longer deferred periods result in lower monthly cost- however it's important to consider background funds you have available as you will be solely responsible for your expenses during this period.

Level or increasing cover is another important consideration for your income protection policy. Opting for level cover means the monthly benefit amount and premium will stay the same across the term of your policy. Increasing cover will offer protection against the impact of inflation by rising each year and usually has several options. These options will typically be a set percentage increase each year, say 3% or 5%, or linked to the Retail Price Index. Bear in mind that increasing cover means your monthly premium will also go up each year.

As with other protection products, there are optional 'riders' available such as waiver of premium, fracture cover and virtual health services. These vary more specifically depending on provider and will be discussed as part of your advisor's recommendation to you.

Our advisors provide free life cover advice either as a standalone policy or in conjunction with a new mortgage. Click the button below to arrange a full review with us today.