Just like this blurred picture, different insurance policies can make you blink whilst trying to understand what is actually captured here. Many of us have heard of policies such as life insurance and income protection but are not actually sure of their actual meaning.
The reality is that the two policies are very different and it’s important to understand what they are if you are planning on purchasing a policy or reviewing your employment contract for benefits. As always, I am here to help you out and explain the difference, of which there are two main ones:
- The circumstances in which the policy pays out:
Income protection is a policy designed to pay out if you’re struck down (and consequently unable to maintain your employment) by a serious injury or long-term illness. Life insurance only pays out in the event of your death. And while income protection benefits the policyholder directly (should your earning ability be critically hampered), life insurance compensates your loved ones and not yourself for obvious reasons.
- The timing and manner in which they compensate the benefactors:
Income protection seeks to make a series of consecutive payments, affording the recipient/policyholder a pre-agreed percentage of their regular employment income and is generated for the duration of your injury/illness lay-off or until you reach retirement age.
On the other hand, convention dictates that life insurance takes the form of a one-off, pre-determined lump sum.
But what are the definitions?
This is all very well but for those of you who like precision here are the definitions:
Life Insurance: Life insurance is a protection against financial loss that would result from the premature death of an insured. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.
Income Protection: Income Protection insurance provides a regular replacement income if someone is unable to work because of illness or injury. Typically, a policy pays out after they’ve been off work for 6 months (often called a deferred or waiting period) and can pay up to 60% of their salary until either they return to work, die or reach retirement age, depending on the policy terms and conditions.
So, as you can see the two are quite different but both policies are essentially protecting your family should harm come your way. Sounds logical to me yet amazingly a far greater number of consumers purchase cover for their pets and mobile phones rather than any form of insurance protecting themselves and their families against the loss of income or death.
I hope this has provided clarity regarding the different solutions available to you. As always, happy to speak further if you want to discuss your options.
“Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against loss of income”