What are the different types of Income Protection?
Income protection is a type of insurance which seeks to replace your income in the event that you are unable to work due to illness or injury. There are different types of income protection for different purposes, with a number of variables to consider within each type.
Anyone considering taking out cover of this kind will need to consider a range of factors and this article aims to give a brief introduction to help point you in the right direction rather than providing a comprehensive guide to a complex subject. There are limitations on the level of cover that can be obtained, as well as on the length of time the policy will run.
The primary purpose of the various types of income protection is to ensure that you can cover essential bills, loan repayments and day-to-day living expenses if you are unable to do your normal work.
Short Term Income Protection
Short-term income protection is designed to cover a loss of earnings for a limited period of time, usually for two years, they can provide a payment period of 1 and 5 years with certain insurers, after you fall ill. This type of income protection only pays out for the agreed period, or until you are well enough to return to work, whichever comes first. In the event that you have a long-term illness, or an injury which prevents you from returning to work permanently, it would give you time to make other arrangements, for example if there was a legal claim to pursue, without missing bill payments. This is something of a budget option since the payments are for a limited period only. For those who feel they will need their pay-outs to carry on for a longer period, there is always long-term income protection.
Full-Term Income Protection
This type of income protection is designed to replace loss of earnings caused by illness or injury for as long as is necessary, right up to retirement age. Because the potential claim is greater than for short-term income protection the cost of cover is higher. Just as with all types of income protection, the policy cannot be set up to pay more than a proportion of your normal regular income although it can of course be reviewed over time and increased if appropriate. In the event of a claim the policy would take over, after any employer’s payments cease, to pay the appropriate level of cover for as long as the insured is still unable to return to work. This means of course that a claimant falling ill at the age of thirty, for example, would receive regular monthly payments until you are able to return to work or the end of the policy whichever is sooner. This could mean a continuing payment for many years if the condition stops you from ever returning to your current occupation.
How much Income Protection do I need?
As already outlined, there is a maximum sum assured the policy will offer. It is however possible that you do not require the full amount. If, for example, commuting expenses such as rail fares, or fuel costs are a significant proportion of your regular expenditure, you would not need to replace the income that covers this. A budget planner is useful to better understand the outgoings that are essential and the ones that are not which means the policy can be tailored to your needs. Even if you are fairly confident you understand these issues, it is recommended you discuss this with an adviser who can assess your current circumstances and make recommendations based on your personal situation.
As well as there being different types of income protection, it is worth remembering that there are also a great many variables within each policy type discussed here, and this article can only give a very basic overview. The main points are that you must be in employment and be able to prove your income. You can get cover for a fixed short term, or for a longer term which would usually be until your normal retirement age, although if you have other aspirations, retiring early for example, then this can be factored in to the policy. Income protection insurance covers you against loss of earnings caused by accidents or illness which mean that you cannot earn your normal income. There are factors that could affect the policy such as continuing income from your employer which could reduce the sum paid by the insurer. Before proceeding it is essential to get more detailed and specific advice on your chosen policy.
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