Do you need another Income protection insurance policy?

Income protection insurance is a type of life insurance that provides an income if you're unable to work. It's often overlooked, because being out of work is not the cheeriest thing to think about. The insurance payment kicks in after a certain period and covers a portion of your income. And, like many things in life, it's not as simple as it sounds.

There are two main types:

Agreed-value insurance, the most expensive option pays out a benefit agreed to reflect your income at the start of the policy. This type's not affected by any fluctuations in income - kind of like 'agreed value' car insurance cover, rather than market value.

Indemnity value policies are cheaper and more common. These verify your income at the time of making a claim and may adjust your benefit accordingly. So your payout salary can depend on things like maternity leave, working part time or becoming unemployed.

Indemnity value policies provided by super funds are the cheapest, with fewer features and less flexibility. They may also be limited to a shorter time period.

How long does it last?

This depends on how much you want to cough up for better contract terms. The more you pay for the insurance, the longer they'll pay you in the case of illness or injury. Policy terms range widely, from two to five years, or up to age 60 or 65.

Do I need income insurance?

It depends. Income protection policies are designed to meet the costs of 'living', rather than ensuring family members receive a payout after your death. If you're young and single with no dependents and limited fixed expenses, income insurance is useful. If you're a family type who needs to look after loved ones, life insurance may be a better bet.

So how much cover do I need?

Here you'll need to do some homework. Income protection covers roughly 75% of your income if you're sick, injured or unable to work. To get the best cover you'll need to budget your standard costs - like monthly mortgage or car loan payments – along with any dependents you want to provide for, plus the cost of managing any investment assets. This will help you decide what level of cover you need.

How much will it cost me?

Shop around and compare cover and prices - they differ greatly. Premiums are set depending on:

• age (premiums may increase or cover may decrease as you get older)
• gender
• health and pre-existing conditions
• whether or not you smoke
• occupation (for example, a manual laborer pays different premiums to an office worker)
• the time you choose to wait before receiving payment

Stepped or level income protection insurance premium… say what!?

The fun doesn't end there. Now we'll talk about different types of premiums.

• A stepped premium starts out cheaper, but increases over time.
• Level premiums are constant but vary depending on age at entry. They start out more expensive, but after 10 to 12 years of cover they're the cheaper option.
• If you plan on sticking with the same provider, a level premium is better in the long term.
• If you like to shop around, a stepped premium is wiser.

The tips and traps of income protection insurance

This isn't an exhaustive list. Before committing to a policy you should compare product disclosure statements. You might also consider getting professional financial advice.

• When taking out a policy, ask these key questions: What's covered? What's not covered? How much will I be paid after a claim? What will the insurance premiums cost now and later?
• Consider getting a policy with index-linked premiums and cover so you know it will keep up with inflation.
• Consider a non-cancellable policy, otherwise companies may reassess your health or other factors on each renewal, possibly raising your premiums or refusing to continue cover.
• Look for a policy with Guaranteed Future Insurability, a benefit that allows you to increase your level of cover without further underwriting. This is important if your circumstances change due to things like buying a home or having a child.
• Offset clauses allow insurers to reduce payouts if you have other income (for example, sick pay or Centrelink benefits). Check the relevant section of the policy for details.
• With group insurance provided through super: the agreement is between the fund trustee and insurer. This may make the claim and payout less straightforward. Check the waiting period (how long before you receive payment, often 30 or 90 days) and the benefit period (for how long payments will be made — typically two years or sometimes until your normally expected retirement age).
• Some policies pay out if you're unable to perform your normal occupation. Others only pay if you can't perform any occupation for which you're suited by education, training or experience. Look out for policies that pay if you're unable to perform your regular occupation.

Watch those terms

When taking out any insurance policy, you should check carefully the terms and conditions. You should also check the way the key terms of the policy are defined.

Nick, a farmer from Gloucester, found this out the hard way:

Nick had an income insurance policy with a large insurer. The policy was fine, but Nick had a not-so-typical income situation, because the money he made varied depending upon the success of the farm each year.

When Nick had an incident, the company refused his claim because they had defined his assessable income as being based on his taxable income. Sadly for the year in question, Nick had no taxable income. Instead, his income that year came from a legitimate repayment of money he'd lent to the family company in previous years.

Nick had seen no mention of 'taxable income' being the basis of assessing the insured's income. Luckily he was able to use an independent claims assessor to help negotiate with the insurer and eventually reach a compromise.

• Our tip: It's important to read all the terms to make sure you're not caught out at a tough time.

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Know about illness insurance

What is illness insurance?

Illness insurance protects your income if you are unable to work because of an accident, long-term ill health or disability.There are several different kinds of illness insurance. Some pay out a single lump sum, some will pay out a regular monthly income, while others will cover payments for specific things, such as your mortgage or credit card payments.
On this page we explain why you might want to think about taking out illness insurance. You can find  out about the  different types of illness insurance available, some of the benefits they provide and what you need to think about before taking out one of these types of policy

Why take out illness insurance

If you can’t work because of illness, accident or a disability, you may be able to get state benefits or sick pay from your employer if you’re unable to work. However, these may not cover all your needs.
You might find relying on state benefits or sick pay alone would leave you with a much lower standard of living than you are currently used to.  You might also find that you don’t have enough money to pay off any  loans you may have taken out or to keep up the re-payments on your mortgage. You  could find yourself falling into debt and  could lose your home, be taken to court by people you owe money to or even be made bankrupt.
Even if you can get state benefits or sick pay from your employer,  it might be worth thinking about taking out one or more of the types of illness insurance as well, to boost your income. However, most types of illness insurance do have drawbacks and limitations which you need to look out for.

State benefits

State benefits such as Statutory Sick Pay (SSP) and Employment and Support Allowance (ESA) pay a very low rate of income. There are other restrictions too. SSP only pays out for a limited period of time, while for ESA you may have to undergo regular medical assessments and it can be stopped if you don’t pass them.
It’s worth checking how much money you would get if you had to rely only on state benefits and comparing this with how much you think  you would need to live on.

To get an estimate of how much benefit you might get, use the Benefits Adviser on the Directgov website at: www.direct.gov.uk.

Employer’s sick pay and pension

Your employer may pay you Contractual Sick Pay. This is also called enhanced sick pay and it means that you would get all or part of your regular salary for a set period of time if you can’t work. Contractual Sick Pay can be paid at a lower rate than your normal pay.
Some firms will also pay your pension early if you have to retire early through ill-health, although the amount you get might be less than if you had worked to retirement.
If you’re not sure about what benefits you’re entitled to from your employer if you are unable to work through ill-health, you should ask them for details.

Self-employed people

Illness insurance can sometimes be a good option if you’re self-employed. This is because you can’t get pay from an employer and there are some state benefits you won’t be able to get either such as Statutory Sick Pay. However, there are some types of illness insurance you may not be able to get if you’re self-employed, so you will need to check policies very carefully before you take one out

Types of illness insurance

Here are some of the main types of illness insurance available. For more detailed information about  these types of insurance

Critical illness insurance

This is a kind of illness insurance that pays out a lump sum if you are diagnosed as having a specific illness such as cancer or heart attack. If you have a mortgage you may have been sold critical illness cover when you took out your loan. This is not the same as mortgage payment protection insurance.

Income protection insurance

This is also called permanent health insurance. This is another kind of illness insurance that would pay you an income for the rest of you life or until you reach retirement if you can’t work because of ill-health or disability. You usually have to wait a few weeks or months before payments start.

Payment Protection Insurance

This is a kind of insurance that you take out to cover mortgage, credit card, store card or personal loan payments if you can’t work because of ill health or are made unemployed. You may have to wait a few months before the payments start. They will only cover you for a limited period and usually stop after a certain amount of time.

Mortgage payment protection insurance

This is the same as payment protection insurance but will only cover your mortgage payments.

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You've struck out and set up your own business

You've struck out and set up your own business - but can you afford to insure yourself in case things go wrong? Part two in a series on insurance for different stages of life

When you are moving from a staff job to self-employment, you need to think about how to cope with sickness or an accident that leaves you unable to work. Yet this is also the time when you are most likely to be short of cash. You will lose the sick pay, maternity leave and death in service benefits that came with employment, plus you will not have access to a workplace pension scheme. You will need to think about a stakeholder pension to replace it.

MikeRothman, a senior financial consultant with Best Advice, based in Sutton, Surrey, takes a holistic approach. 'There are four considerations: what can you afford; what existing arrangements do you have; do you have any dependents or liabilities and what is your attitude to risk?

'The cover you need depends on the size of your mortgage and whether you have taken out any loans to build up the business. For example, you might have a new car loan to replace the company car that your employer provided.

'If you have a family or dependents it is important to make arrangements to ensure debts could be paid if something happened to you as the main breadwinner."

He recommends life cover as a top priority for anyone with a family. If you can afford it, he also suggests income replacement (also know as permanent health insurance, or PHI) which would pay out if you were unable to work because of illness or injury. 'You would need some cash in an emergency fund because PHI policies tend to have a three- to six-month exclusion period before the payments start. Once you have taken out PHI, however, the insurer has to honour the contract if you wish to continue it until you stop work.'

Income protection is expensive - it costs around £500 a year to cover income of £10,000 a year until you are 65. It is cheaper if you defer payment for more than three months, as the table above right shows. But don't be tempted to cut corners by opting for 'any occupation'. This means the policy would not pay out unless you were unfit for any job. You want cover for when you are unable to do your own job, known as 'own occupation'.

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The cost of 'own occupation' cover is more expensive the older you are, and women pay more because they are more likely to make a claim.

Roderic Rennison, financial planning director of financial adviser Charcol, which is part of Bradford & Bingley, also advises making income protection a priority. 'You are not likely to need life cover in your twenties and thirties but you may well need help if you are unable to work. Income protection should be factored in as part of your business plan.'

Graeme Warner, a director of health intermediary Manson Warner Healthcare, believes PHI is too expensive for most people. 'It only kicks in when you have already had a considerable time off work. Likewise, critical illness cover, which pays a lump sum if you had a heart attack or stroke or if you developed cancer, is very costly.'

Critical illness cover can easily cost £50 a month. Warner says private medical insurance would be a better option because it would help you get back to work as quickly as possible. You can opt for any level of cover, from full in- and outpatient down to restricted plans that have a limited choice of hospitals. The table above left shows the premiums for a single person in their thirties. Then there is the question of whether you are at risk of being sued in your new business. Peter Smith of the London-based independent financial adviser Inter-Alliance suggests professional insurance can be more important than healthcare and life insurance.

'In some professions you need indemnity cover before you start working. If you are a scaffolder, builder or IT contractor you need to ensure that you can't be sued by the people you are going to work for, or that if you injure someone you have the right cover in place.'

After professional indemnity, he favours sickness and accident cover, which is relatively cheap and straightforward, or income replacement if you can afford it.

'Sickness and accident cover pays out if you can't work, but it's only a short-term fix,' he says. 'Income replacement will pay out until retirement age at 65, if necessary. But obviously the latter is a much more expensive option.' A man aged 35 earning £35,000 would have to pay between £16 and £37 a month for a PHI policy to protect his income until 65. Alternatively, £20,000 worth of accidental death cover would cost around £24 a year with Norwich Union.

Self-employed people also have to fund their own pension. The new stakeholder pension guarantees that charges and terms will be good value - although it does not guarantee performance.

Roderic Rennison of Charcol says you should start your pension only after sorting out life insurance and income protection. Even then, it may not be the best option if you are looking to buy a house. 'Sort out the deposit for your home before arranging a pension. It is better to set a budget and decide how much you can afford to save than to try to fund everything all at once.'

So your priorities will depend on how many other people depend on your income and what kind of debts you would need to pay off if you were unable to work. Above is a checklist to help you with priorities.

Are you sitting comfortably?

1. Have you got an emergency fund? Six months' earnings tucked away in a deposit account will tide you over if you need cash quickly or if you are sick.

2. Do you have dependants? If so, consider life cover, which would provide a lump sum to pay off debts and the mortgage if you died. If you are single you can do without it.

3. How would you cope if you were unable to work? Sickness and accident policies will provide short-term help; more expensive income-replacement policies will cover you for the rest of your working life.

4. Is there a risk of you being sued? Check whether you need indemnity cover - your trade union may provide a dedicated policy.

5. Could you cope with being on an NHS waiting list or do you want private cover? The issue is both one of cost and of principle - some people object to the concept of private medical insurance while others find the premiums too high.

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