Income protection insurance is also referred to as: permanent health insurance, income cover, income protection, income protection cover, sickness insurance and simply insurance protection. The key to identifying the right product is knowing precisely what income protection insurance is and what is covered in the T&Cs.
What Is Income Protection Insurance?
Income protection insurance is designed to protect the insured from lost earnings in the event of not being able to work through illness or disability. Policies include protection on: loans, credit cards, mortgage payments and even complete loss of income.
Income cover allows a person to choose how much cover they require, but it is usually capped at 60% of earnings. There are several reasons why a 60% cap normally exists.
The main reasons for the 60% cap are because any benefits paid under the income cover plan are free from tax. There also needs to be an incentive for the person to go back to work after returning to good health as the insurance cover could potentially cover the insured until retirement.
Identifying the Best Source of Income Cover
The most important thing to identify in the T&Cs is the definition of the term 'unable to work' and what happens when the insured can now only work part time. Typical definitions include:
- Unable to do the job normally done;
- Unable to work in a similar job;
- The inability to do any sort of paid work.
The best policies provide insurance for the job that is normally done, but they cost more. Other forms of sickness cover can result in a 'partial' or 'rehabilitation' payment when the insured is only able to return to work in a part time capacity.
What is Not Covered by Income protection Insurance
The following will not be covered by any form of sickness insurance policy:
- When the insured is still being paid by an employer;
- Pre-existing medical condition. Any illness that has previously been an issue to the insured will be specifically excluded due to the risk;
- The participation in any dangerous sports that were not specified to the insurer prior to the policy agreement;
- All forms of alcohol and drug abuse;
- Pregnancy and childbirth
- Any form of self-inflicted injury.
The Deferred Period Before Permanent Health Insurance Commences Coverage
All permanent health insurance policies have a deferred period before the policy will pay out. This period can be between 4 and 52 weeks. The longer the deferred period before the income cover has to pay out, the cheaper the income cover will be.
It is necessary to perform an assessment of how long can realistically be survived before permanent health insurance cover would become a necessity. Some employers will pay employees for up to 6 months on full pay. The self employed won't have this luxury so income cover is all down to personal savings.
Getting an Income Protection Insurance Quote
Whilst it is possible to buy directly, it is advisable to get an income protection insurance quote from an independent financial advisor. This will allow the advisor to trawl through the entire market to select the cheapest product that provides the best cover based on the specific needs of the insured.
Not getting an income protection insurance quote from an independent advisor leaves the insured open to selecting the wrong product. For example, it would be foolish for a self employed person to select income cover with a deferred period of 52 weeks as it would be a year before any financial coverage would commence.
Making a Claim Under a Permanent Health Insurance Policy
The policy document will specify when the insured should inform the insurer that a claim will need to be made. Once actioned, it will be necessary to provide a medical certificate each month to the insurer as proof.
There is state assistance with mortgage payments available to people claiming benefits, but a deferred period still exists. A new state scheme is due to commence in early 2009 which will provide assistance to those with mortgages up to £400,000. It will only be a voluntary code and consist of certain lenders.
Taking out insurance cover is an excellent way of preventing debt problems in the event of ill health. If it is too late to take out insurance cover, debt problems are an issue. If debt problems are an issue, talk to a qualified debt counsellor as they will be able to provide invaluable guidance and help.
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