You may wonder how you might pay your mortgage if an illness or injury prevented you working. Nicola Downs, director at Trentham Invest, says ‘The impact of you stopping working could be devastating for your family.’
Protecting your loved ones by taking out income protection insurance that pays out if you become unable to work could prove to be a wise move. Here we explain how it works and why it could make a big difference:
What help is available from the government / my employer?
Many of us expect the government – or our employers – to step in should we become unable to work. And indeed the state benefits you qualify for can offer some limited help, particularly if you have a mortgage. You may even qualify for housing benefit, but it can take months to arrange and normally will only cover the interest on your loan.
Even if you are employed full-time, your employer will also generally stop paying your full salary after a period of time – leaving you and your family to survive on benefits. This can be from as little as £85 per week.
How can income protection insurance help?
Designed to help cover your outgoings while you are unable to work, income protection kicks in if you have an accident or fall ill. Payments should therefore start as soon as you suffer a loss of income.
If claimed in accordance with your policy’s terms and conditions this could be within a few weeks of your accident or - if your contract states that your employer will continue paying your full salary for a set time - the payments could start when your salary payment stops. In other words, you can defer payment of benefits to suit your circumstances and reduce the cost of the cover.
You’ll also need to consider how much income you want to receive while you are not working. You can generally choose to receive up to 75% of your salary but, again, you will pay less for cover if you think you can survive on 50%.
I have critical illness insurance. Is that not the same?
Protecting your financial security with critical illness insurance is a sensible move. However, insurance of this kind does not replace the need for income protection cover because the benefits offered are very different.
Critical illness insurance pays out a lump sum if you are diagnosed with an illness that is included on a pre-determined list.
Income protection insurance, on the other hand, pays you a regular income if you are unable to work due to an illness or an injury.
What else do I need to know?
No matter how comprehensive the protection, insurance of this kind will not cover loss of income due to redundancy or being sacked by your employer. Illnesses that you have had in the past are also likely to be excluded, as are certain professions.
Deep sea divers, for example, will find it hard to find cover, while short-term contract workers will generally be turned away. Checking the small print before taking out a policy is therefore crucial.
‘Read the terms and conditions of the policy carefully, and make sure you understand all the definitions,’ says Nicola.
'You may, for example, be surprised that an insurer who refuses to pay out for claims linked to misuse of drugs considers forgetting to take prescription medicine as a form of “drug abuse”.’
Practicing extreme sports such as skydiving or rock climbing will also push the price up due to the risk of injury.