Income Protection

Income protection (sometimes also known as permanent health insurance) is designed to provide you with a monthly, tax free benefit in the event of you becoming incapacitated and unable to work due to illness or injury.

This type of policy is there to support you financially in such an event, until your policy term/pay-out term ends, or when you return to work or die – whichever is earliest.

In the event of a valid claim you will have to wait for a certain period of time to pass before the monthly benefit will start to pay out - this is called your 'deferment period'.

A deferment period can be from one day, up to two years with certain providers. Typically, the longer your deferred period, the lower your monthly premiums may be.

How much your monthly pay out (your 'policy benefit') will be is agreed when you start your policy. It’s important to understand that income protection policies are not designed to put you in a better financial position than if you were able to work full time. As such, your monthly pay out amount is restricted to a percentage of your gross annual income (up to 65% depending on the insurance provider).

Income protection is different from critical illness insurance, which pays out a lump sum if you are diagnosed with an defined illness of a specified severity.

Most modern income protection policies do not include cover for redundancy or unemployment. 

There are two main types of income protection:

‘Limited Term’ or ‘Budget’ income protection where the monthly benefit is restricted to a certain period of time (typically 1, 2 or 5 years) in the event of a valid claim. There may be restrictions on the number of times you can claim or how more than one claim for the same incapacity may be treated. These policies typically cost less than a ‘Full Term’ income protection policy, so may be a good option for those looking to keep costs down. 

‘Full Term’ income protection is a policy where the monthly benefit is not restricted to a certain period of time. In the event of a valid claim, a full term income protection policy will provide a regular monthly payment until your policy term ends, when you return to work or when you pass away – whichever is earliest.

The cost of income protection insurance is typically impacted by: 

• Your age - unfortunately as we get older we are more likely to have medical conditions arise and therefore are comparatively more likely to need to claim on the policy, as such premiums are generally higher the older you are when you apply for cover. 
   
• Your health and lifestyle information - the insurer will ask questions regarding you and your family medical history when you apply. They will also want to know if you participate in any dangerous hobbies, if you smoke or drink heavily too. 
   
• Your occupation - if you have a job which is considered higher risk (e.g. offshore on an oil rig, armed forces, or do a large amount of manual work) your premiums will be higher than someone who does something considered as relatively low risk (e.g. an office worker). 
   
• Your defered period (the 'waiting period') - generally speaking the longer you can wait before your income protection policy starts paying out, the lower your premiums will be. 
   
• The type of income protection policy you secure - a 'Limited Term' income protection policy typically costs less than a 'Full Term' income protection policy due to the restrictions placed on the duration of potential policy pay outs.