Income protection insurance- how critical is it?

Income Protection Insurance

Surprisingly enough this is a question I get asked often. Do you want to know my honest answer?

It depends who you ask…

If you ask the insurance companies they will say it is completely critical and essential. On the other hand if you ask the individual in question they would rather keep the money. As a mortgage advisor, I tend to agree with the insurance company. Saying that I would always consider your personal circumstances first. To give you an analogy, if you had a cash machine from which you could withdraw £25k every year, would you insure it? More importantly if your livelihood depended on this cash machine, would you insure it?  I know I would.

If you read my Blogs you would have come across this topic before as it’s something which I see as very important.  When I advise my clients on the best mortgage deal available to them I also like to make sure they get the best advice in general. In my book, it makes good sense to protect yourself if you are taking up a big financial commitment such as a mortgage.

So what is income protection insurance?

Income protection insurance is a long-term insurance policy to help you if you can’t work because you’re ill or injured.

  • It replaces part of your income if you can’t work because you become ill or disabled.
  • It pays out until you can start working again, or until you retire, die or the end of the policy term – whichever is sooner. Some insurers will offer a ’budget plan’ where the plan will pay out for a limited period eg: 2 years, which helps to reduce the premiums.
  • There’s a waiting period before the payments start. You generally set payments to start after your sick pay ends, or after any other insurance stops covering you. The longer you wait, the lower the monthly payments.
  • It covers most illnesses that leave you unable to work, either in the short or long term (depending on the type of policy and its definition of incapacity).
  • You can claim as many times as you need to, while the policy lasts.

Why should you consider it?

According to the ABI, one million workers a year find themselves unable to work due to a serious illness or injury. It doesn’t matter whether or not you have children or other dependants – if illness would mean you couldn’t pay the bills, you should consider income protection insurance.

You’re most likely to need it if you’re self-employed or employed and you don’t have sick pay to fall back on. But even if you are employed check what your employer will provide for you if you’re off sick before you make a decision.

Who doesn’t need it?

You might not need income protection insurance if:

  • You could get by on your sick pay – for example if you have an employee benefits package which gives you an income for 12 months or more.
  • You could survive on government benefits – but they might not be enough to cover all your outgoings
  • You have enough savings to support yourself – remember that your savings may need to see you through a long period.
  • You could take early retirement – if you’re near retirement age, perhaps you could afford to retire early. If you are unable to return to work you may be entitled to take your pension early.
  • Your partner or family would support you – perhaps your partner has enough income to cover everything the two of you need.

I hope this is helpful in terms of clarifying the subject and considerations. You can read more about the type of insurances available to you here. Should you need some advice I am always happy to speak with you so get in touch.

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