None of us likes to dwell on the unpleasant things that life might throw at us. Whether it’s planning for death or illness, humans seem to generally prefer to postpone the bleaker considerations in life rather than looking for the correct insurance product.
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.
You’ve probably already got life assurance to cover things like the remainder of your outstanding mortgage debt in the event you or your partner dies before the loan is repaid. You might even have critical illness cover, which will pay out a lump sum on diagnosis 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.
There are various levels of income replacement cover, but in simple terms, income protection guarantees you a monthly sum of money – usually up to 80% of your salary – if you suddenly find you’re unable to work.
Income protection should not be confused with payment protection insurance (PPI), though it often is.
PPI, now at the centre of probably the largest mis-selling compensation process in UK financial services history, was supposed to guarantee your payments on debts to lenders and was often sold to consumers with a loan, hire purchase agreement, credit card, overdraft or mortgage.
That meant any payment from a PPI claim went directly to your creditor and not to you personally.
Conversely, income replacement or protection does what it says on the tin: it replaces 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.
The question is, do you need income protection? The short answer is that it 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.
One good idea is to find out whether your current employer offers a form of income replacement as part of its employee benefits scheme. It may also be that your employer offers a generous sick pay package which might cover your outgoings if you had an extended illness.
But for many people, income replacement offers peace of mind in an uncertain world. The truth is, we usually buy insurance products in the hope that we’ll never need to claim against them. However, none of us knows what’s around the corner, and so prudent planning is a sensible step.
Income replacement or protection could be useful if you’re forced to take an extended leave of absence through illness or if you lose your job through compulsory redundancy, for example.
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 need to think about other things, too:
whether or not to take out a policy that’s index-linked to inflation – meaning any payout will also rise with it (remembering that your premiums will also rise with it)
what deferral period you need before a claim is paid out – the longer you’re prepared to wait between making a claim and receiving an income, the lower your premiums are likely to be (your employer’s policy on sick pay could inform this choice)
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? It’s common for the end of a policy to coincide with planned retirement – but if you’re likely to be working beyond state retirement age, you may require a longer policy, which may well increase the cost of your premiums.
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.
Want to know how other clients felt about working with Oportfolio? Watch Gus and Selena’s video story!
To find out more about our friendly and professional mortgage service, fees and what we can do to help make sure you’re not paying over the odds for your mortgage, why not visit www.oportfolio.co.uk or give us a call on 020 7371 5063.
Oportfolio Limited is an appointed representative of Primis Mortgage Network, a trading name of First Complete Limited which is authorised and regulated by the Financial Conduct Authority
Your property may be repossessed if you do not keep up repayments on your mortgage.
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