This article attempts to take a brief look at a complex subject and should not be your only guide to decision making. If you are considering taking out some form of income protection insurance, you will probably be asking yourself ‘when do I need income protection?’ which in a sense is the same as ‘do I need income protection now?'.
We will take a look at whether there is a ‘right time’ to take out this type of insurance, and how your premiums might change in future years. Lastly, we touch briefly on the question of whether there may be any issues which make getting cover more difficult. Hopefully, you will find this article a useful starting point if you are thinking about proceeding with some form of income protection cover.
Is there a right time to take out Income Protection?
As is so often the case, the answer to the question ‘When do I need income protection?’ comes down to your personal circumstances. If you want to ensure that you will be able to afford bills and living expenses in the event of being unable to work due to an accident or sickness then, as with most types of product based on your health, taking it out early in life is usually a good idea. You are less likely to have pre-existing conditions that will not be covered, or which will have qualified cover.
However, a significant factor in taking out income protection, and deciding whether you really need it, is the question of how much of your monthly income is tied up paying for essential unavoidable expenses. Somebody in an executive role with a very large mortgage and several dependants would need to replace a significant proportion of their lost income in the event of being unable to work due to accident or illness. And just because it is your first job, still living with your parents and have no liabilities does not mean this is not appropriate. Although it may not be necessary to cover your maximum income, it can still provide a monthly sum to pay for additional treatment or provide services to help you regain fitness and return to work.
So broadly speaking, earlier is usually better, but you would need to take your own personal circumstances into account and get expert advice as to what is the best choice for you. Ultimately, the question ‘when do I need income protection insurance?’ boils down to when you have regular essential outgoings which you would not be able to cover in the event of losing your ability to work.
Do Income Protection monthly payments increase as you age?
Yes and No, the choice is yours. There are three distinct types of policy you can have, age costed, reviewable and guaranteed premium.
With regards to an age costed and reviewable policies you will initially have a lower premium compared to a guaranteed policy but over time this will increase, normally by a set amount for age costed and more changeable with reviewable. For each year that passes which means over time you could end up paying more for a policy. As your age increases the increases in premium each year get significantly greater and real consideration should be made as to whether this would be the best option for a long term policy.
A guaranteed premium would remain the same throughout the term of the policy so while initially a higher premium over the term of the policy is likely to cost considerably less.
The complexity of income protection insurance means that there is no obvious simple answer to this question because it will depend on your changing circumstances over time. This makes it difficult to answer the question “When do I need income protection?” in respect of how much premiums are likely to be. But the biggest factor in the cost of premiums is an increase in the level of cover required. If you take out long-term income protection and then fall ill with a long-term condition, or are seriously injured, with no prospect of a full recovery, the payments would be expected to continue until your retirement age. As such, while you are statistically less likely to fall ill in when you are young, the level of risk to the underwriter is far greater should the worst happen. If you are looking at short-term income protection, either to tide you over for a period of time while you adjust your finances, or a policy to cover a specific essential outgoing such as your mortgage or a loan repayment, then the cost of any pay out will be limited to the term of the policy and, as such the cost of premiums is far more dependent on your own physical fitness and health.
Why might you have a problem getting Income Protection?
From the point of view of the underwriters, the overriding factors are how likely is it that they will need to pay money out and how much money that is likely to be. When considering the question “when do I need income protection?” your main factor is going to be whether you need to replace income lost as a result of accident or illness. Of course, the more likely you are to become ill or have an accident, the more you need this type of protection, however, this also correlates with greater difficulty in obtaining protection and higher premiums. Risk of an accident is increased with more dangerous professions, e.g. involving working at heights, around heavy machinery, or involving high mileage driving or heavy physical work. It is also increased if your lifestyle involves a lot of travel or participation in dangerous sports, or if you are not in overall good health, e.g. obese, smoker, etc.
Usually, you can still find a suitable income protection or ASU policy for your needs, but it may involve more shopping around and higher premiums than might otherwise be required. For more information, you can check out what existing health problems affect income protection?
Related article: What existing health problems affect Income Protection?
In conclusion, when asking the question ‘when do I need income protection?’ the question is ultimately one relating to your unique personal circumstances and may vary wildly from person to person. Unlike simple whole of life, income protection comes in a greater variety of types and has rather more variables relating to your income, occupation, lifestyle, overall health, and specific financial commitments. The amount of the pay-out can also vary wildly depending on how long you are unable to work, how long other forms of payment are available to you, whether or not you have savings or critical illness cover, how quickly you recover, and how long the pay outs will continue if you should be ill or injured long-term. As such, it is important to get a full assessment of your needs and to take expert advice before proceeding with any specific policy.