There are some things that most of us would prefer not to think about such as getting protected. That’s why the consumer watchdog Which? estimates that only 54% of people have a Will.
It probably also explains why, according to a recent report for a leading insurance company, only 9 per cent of self-employed workers in the UK have an income protection policy to safeguard their financial security if the worst happened and they lost their job.
If the pandemic has taught us anything it’s that we can’t take some things for granted. Across more sectors than we might care to imagine, people’s livelihoods have come under sudden and unexpected threat.
Yet, planning for the problems you could face is vital if you want to have peace of mind over your future and the financial security of the people who matter to you.
The chances are that if you have a mortgage you also have life assurance to cover things like the remainder of your outstanding mortgage debt should you or your partner die before the loan is repaid.
And some people might have critical illness cover to pay for your care and cover your bills were you to be diagnosed with one of a specific range of illnesses.
The insurance product you probably don’t have – but might be wise to have – is income protection cover, also known as an income replacement cover.
Income replacement cover comes in a variety of flavours, but in simple terms, it guarantees you a monthly sum of money – usually up to 80% of your salary – if you suddenly find you’re unable to work.
Income replacement will replace your income to a specified level and for a specified period of time when you’re not earning, giving you financial support with all of your living costs rather than just your debts.
Do I need income protection?
This depends on your individual circumstances and you should always seek professional advice before making any investment decision. An adviser will be able to help you judge whether or not you’ll benefit from the policy.
If you’re employed, find out whether some form of income replacement makes up part of its employee benefits scheme. If your employer offers a generous sick pay package that might also cover your outgoings if you had an extended illness.
We usually buy insurance products in the hope that we’ll never need to claim against them. But planning for the worst and hoping for the best is a sensible step.
There are generally three categories of income protection: policies that cover activities of daily living, suited occupation or own occupation and although the specific terms of each may vary from provider to provider, they generally cover the following eventualities:
Activities of daily living: the lowest and cheapest form of cover, this policy only pays out if specified activities – perhaps lifting or walking – become impossible for you. The benefits of this cover are generally regarded as limited.
Suited occupation: if you have this level of cover, you’re unlikely to receive a payout if your insurer thinks you are able to perform a role that is similar to the one you held when you became unable to work. An example might be a nurse who is unable to work in a private health clinic but who could be employed within the NHS.
Own occupation: this cover insures you for the specific role you were in when you became unable to work. It is, not surprisingly, the most expensive of the three, but offers the highest level of cover.
You’ll also need to think about other things:
· Do you need a policy that’s index-linked to inflation – meaning any pay-out will also rise with it (bear in mind your premiums will rise, too)
· What deferral period you need before a claim is paid out? The longer the time between starting the policy and being allowed to make a claim against the lower your premiums will be
· Will your premiums be fixed for the life of the policy, or will they be reviewable, meaning they could rise every few years?
· When would you want the policy to finish?
At Oportfolio, our friendly team is always happy to talk you through your options and, if you decide you need to protect your income, we can help you find a policy that best suits your needs.