What is Income Protection Insurance?

The insurance industry is full of jargon, so the following are some commonly used terms to describe the types of health insurance products that are available.

Whilst the Financial Services Authority (FSA) distinguish the various health insurance policies available between Pure Protection and General Insurance, the definitions used here are as those determined by the CII (Chartered Insurance Institute).

Income Protection Insurance (IPI), also known as Permanent Health Insurance (PHI) is a type of health insurance that pays out a regular income, usually monthly, in the event of an illness or disability preventing you from working.

 

Why would I need Income Protection Insurance?

IPI should be considered for working people whether they are employed or self-employed and may at some time in the future find themselves in the potentially unfortunate position in being unable to work due to illness or disability:

  • If you are an employee your employer may pay your full pay for a few weeks to several months. Employees are eligible for Statutory Sick Pay for upto 28 weeks, but this is a very low level that is often considerably less than your usual pay. Furthermore if your illness or disability goes beyond 28 weeks then you may have to rely on State Benefits such as long term incapacity benefit which again, is likely to be considerably less than your usual pay.
  • If you are self employed you are not eligible for Statutory Sick Pay, but can claim for short term incapacity benefit for upto 28 weeks. If you are still unable to work after 28 weeks you may have to rely on State Benefits such as long term incapacity benefit. In both cases it is likely to be considerably less than your usual income. 

 

How much will IPI pay me on a claim?

The purpose of IPI is to put claimants in the same financial position before they suffered a loss.

For this reason the maximum amount of income that can be replaced from an IPI claim is their usual income less income tax and eligible state benefits, which usually equates to around 50% to 66% of pre-tax earnings.

 

How long will I continue to receive IPI payments?

Income paid or benefit received will continue until you return to work or the policy comes to an end because you have retired, died or the term of the policy has expired.

Provided you continue to pay the policy premiums, you can make repeated claims under the policy if you subsequently become ill again. 

This is because the terms and conditions set at the start of a long term policy such as IPI cannot be changed by the insurer who must renew the cover after each claim until the contract expires.

 

How do I pay for Income Protection Insurance?

Once the amount of benefit you require has been determined your monthly payment or premium for protection under the policy or cover will be offered to you by the insurer’s underwriter after they have reviewed a completed personal questionnaire relating to your occupation and lifestyle including in some cases a medical report.

The premiums may be guaranteed where the monthly payment and benefit is level, i.e. it does not change for the term of the policy, or may be reviewable every one, three, five or ten years depending on the insurance provider i.e. the insurance company underwriting the policy.

 

How should I apply for Income Protection Insurance?

The first and most important step after you have decided you may have a need for IPI cover is to have a discussion with us to provide you with independent financial advice.

Once we have agreed what the most suitable type of IPI cover is for your particular circumstances we make an application and complete an underwriting questionnaire on your behalf to take out a protection policy based on how much you can afford and the amount of cover required, for a length of time to match your needs.

 

Want to know more?

Talk to one of our qualified financial advisers on 01553 777600 or e-mail us at enquiries@ringassociates.co.uk

Also you may want to read the articles by accessing the following Association of

British Insurers website http://www.abi.org.uk/Display/File/Child/855/ABI_Health_Ins.pdf

the Directgov website at http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingMoney/Insurance/index.htm?cids=Google_PPC&cre=Money

and the Financial Service Authority (FSA) consumer guide available on their website at http://www.moneymadeclear.fsa.gov.uk/products/insurance/types_of_insurance.html