The question ‘how much income protection cover do I need?’ depends rather heavily on how much income you have in the first place, and how much of that income you spend on essential, unavoidable expenses which would continue in the event of you not going to work.
Although this article should help you to answer the question ‘how much income protection cover do I need?’ it is only a guide and you should still consider getting expert advice for your specific circumstances before proceeding with any policy.
The first thing to bear in mind is an income protection policy cannot put you in a better position financially than you would have been working, which is the reason why the insurers limit the percentage of your gross annual income they can cover. You must also be able to show an insurable interest with regular employment and be able to provide proof of your income. However you may require less cover than the maximum available, if your essential outgoings are lower than this then the first task is to make a list of your essential outgoings.
List of living expenses to work out how much cover you need
To get an idea of the level of cover you may need, it would be wise to list all of your regular monthly outgoings and assess whether these would continue or cease in the event of being unable to work due to illness or injury. Most people have either mortgage repayments, including interest on the original loan amount, or they pay some form of rent. This is the most obvious and usually the largest single fixed cost to take into account. You may also have repayments or interest on other loans or credit cards. In some cases, you may already have a policy which would cover these repayments, so it is important to check the details of any existing policies before taking them into account.
Costs involved with going to work, such as transport, lunches, work clothes or equipment, and membership of professional bodies or a union may stop or be reduced in the event that you cannot work due to accident or illness.
However, your household bills are likely to continue or even possibly increase slightly. All of your utility bills, electricity, gas, and telephone and Internet package will still need to be paid for. If you have a company car, you may need to consider the cost of replacing it too, as this may be lost if you are incapacitated for extended periods of time.
What factors does Income Protection depend on?
Two of the most important factors to consider, which will affect the cost of premiums on your income protections policy are; the level of cover you require, and how long you would require the policy to pay out in the event of being unable to work due to illness or injury.
There are different types of income protection insurance, some which only run for a fixed short term, typically for two years (although the payment period can be anywhere from one to five years) and others which can potentially replace lost income from the moment you need it until your normal retirement age (see ‘Different types of Income Protection’ for more details).
Another factor affecting the cost of cover is the type of job you carry out. Those who work in office based roles or are primarily admin workers will typically pay a lower premium than those who work in more manual or statistically dangerous roles (see ‘Dangerous jobs that affect Income Protection’ for more information).
If you participate in hazardous pursuits in your spare time - for example rock climbing, riding a motorbike or scuba diving; then your premium may also be increased to account for the additional risk. Providers may also place exclusions or limitations on your policy as a result of any hazardous pastimes too. If you have a dangerous hobby, it may be worth seeking specialist advice to ensure the Income Protection policy you select is appropriate for you, as some providers may be more favourable than others.
Tips to lower your monthly premiums
Of course, there is no sense pretending you work behind a desk when in reality you are a scaffolder. However, there are several ways that you can potentially lower your monthly premiums that are within your control. One of the best ways to do this is to assess the amount of monthly income you need to replace. Taking the time to make a realistic list of what your essential monthly outgoings are could save you from securing excess cover which is not needed, and thus reducing your monthly premium.
Extending deferment period (i.e. the amount of time you wait for your payments to begin after being incapacitated and unable to work) can also save you money. If you have savings or can expect payments from another source such as your employer, you may not need your income protection to pay out for several months.
In addition, certain providers offer incentives and rewards including reduction in premiums for maintaining a healthy lifestyle. Losing weight, attending dental and medical check-ups, and taking regular exercise can all be factors that will affect premiums on such policies. Many providers will also reduce your premium if you stop smoking or do not use any tobacco or nicotine replacement products for at least 12 months.
It is also worth considering whether you need Accident Sickness and Unemployment (ASU) type Income Protection, which covers you for redundancy as well as accident and sickness? If you have good job security, then you may not need redundancy protection included in your policy.
Finally, although it may increase your initial premium, consider paying level premiums rather than stepped premiums which increase over time. This will usually save you more over the term of a contract.
Before taking out Income Protection insurance, it’s crucial you review your essential monthly expenditure and assess what level of income you would need, should be unable to work due to illness or injury.
Be aware that there are many variables to take into account and getting too much cover could mean you are paying higher premiums than you need to. Conversely, getting too little could leave you short in the event of a claim. Because there are so many factors to consider, you should seek expert advice for your specific circumstances before making a final commitment to one particular policy.
To speak to one of our expert advisers and get Income Protection quotes call us on:
03456 44 25 40