Choosing the right income protection policy can seem like a minefield. With so many policy options and confusing industry jargon it can be hard to know what to choose.
Despite a surge in people securing income protection in 2020, as a result of the COVID-19 pandemic, the ease of restrictions in the UK and the sense of our new normal slowed sales down in 2021.
However, the change in circumstances many faced throughout the last two years shows the importance of having the right protection in place should anything happen to you.
But how do you know that you’re choosing the right terms and how do you choose the best provider for you?
Award-winning broker, Reassured, provide their top tips on choosing the best income protection to meet your needs.
What is income protection?
Income protection is an insurance policy that will pay out a percentage of your usual income if you become unable to work due to sickness or accident.
The amount paid out to you will typically be between 50% – 70% of your usual income (the maximum percentage amount will vary between providers).
You’ll receive monthly (tax-free) income payments which can help you to replace lost income while you’re unable to work. You could use these payments to cover:
- Monthly rent or mortgage payments
- Household bills
- Weekly food shop
- Transportation costs (such as petrol or public transport)
- Childcare costs
- Leisure costs
Although the amount you receive won’t exactly mirror your usual income, the payments can be a great financial help when you need it the most and can help you to continue your current lifestyle with minimal financial disruption.
If you are currently unable to work and perhaps in debt as a result, this is Breathing Space Debt article may be of interest.
How do you choose the best income protection to meet your needs?
Without the right help and guidance it can be hard to know how to choose the best income protection policy and provider to meet your needs.
Here are three key steps you can take to ensure you get the right protection:
1. Assess your personal finances
Before taking out any form of financial protection, it’s wise to look at your own finances and look at what you need to cover. This will give you a good idea of how much cover you’ll require.
While the amount of cover you can secure will be capped at 70% of your income, assessing what you need to cover will allow you to establish whether you need the full amount or whether you could secure a lesser amount.
You’ll also need to think about what other forms of finance you have available as this could help you to set important terms of your policy (we’ll explore this in more detail in the following section).
If you have your own savings, receive full sick pay, or have a partner who could help financially, then you may require less cover.
If you have a second source of income or receive state benefits, this will be taken into consideration by providers when calculating your benefit amount.
Overall, knowing what finances you have and what you need to take care of will allow you to be more informed about what you need, so you’re not taking out any unnecessary cover.
2. Choose the right terms
Income protection gives you the flexibility to choose the right terms to meet your needs. You’ll need to ensure that you choose these wisely to make sure your cover is the best to meet your needs:
Length of cover
When taking out income protection you can choose between long term or short term cover.
A short term income protection policy will provide payments for a short period of time, this is usually between 1 – 2 years but can vary between providers.
A long term income protection policy has the potential to provide you with payments up until you reach retirement (if you’re unable to work again due to your injury or illness).
Which option is best for you will depend on your personal circumstances, such as whether you’re in employment or self-employed, whether you have any other forms of finance available and your budget.
Those who are self-employed are likely to benefit more from long term cover, as due to not receiving sick pay from an employer, income protection can help to provide much needed financial support.
Whereas for those who do receive full sick pay, have their own personal savings or are on a tight budget, short term cover may suffice.
Deferred period
Income protection policies will only pay out to you once a set deferred period has passed.
This is the time in between when a claim is made and when your payments would commence. If you’re still unable to work once the deferred period has ended, your payments will start.
A typical deferred period can be from 4 weeks up to 52 weeks but, again, this will depend on the provider.
Some providers will offer a ‘day 1’ deferred period meaning payments can be received within a couple of days – ideal for self-employed workers.
For those who have other forms of finance available, such as sick pay or personal savings, a longer deferred period can be selected (which can also help you to save money on your premiums).
It’s wise to shop around to find the provider who has the most suitable deferred period to meet your needs.
Definition of incapacity
This will help to outline what you can make a claim for. There’s typically 3 main definitions:
- Own occupation – this will allow you to claim if your unable to do your specific job role.
- Suited occupation / suited tasks – you can claim if you’re unable to do your job and any jobs related to your skills and experiences. This means if you can’t do your own job, you may be asked to do another.
- Any occupation – you won’t be able to work in any job in order to make a claim.
While own occupation may seem like the best option as it’s the most comprehensive, for those with more manual occupations, an any occupation definition could actually be more beneficial as the types of injuries you could potentially sustain could better match this definition (and choosing this definition could help you to lower the price of your premium).
3. Use a broker to compare quotes
Each income protection provider will offer different terms, will have different underwriting processes and will offer different price points.
You could conduct research into each provider yourself, but it’s likely to be extremely time consuming.
Comparing quotes using a broker (like Reassured or Cavendish) is the best way to compare multiple quotes quickly and easily, while benefiting from a wealth of industry expertise.
Quotes are also provided free of charge, are personalised to suit your circumstances and are without obligation.
Allowing you to find the best income provider who offers the policy that meets your needs.
Source:
https://www.ftadviser.com/ftadviser-focus/2022/02/07/cover-take-up-tailed-off-in-2021-but-what-does-2022-hold-in-store/
https://www.reassured.co.uk/income-protection/
