What benefits should I expect?

In a life policy, there is a set sum assured which is paid if you die. In a private medical policy the insurer pays the costs of treatment up to selected limits. In a health cash policy the insurer pays out pre set sums. An income protection plan / policy is completely different.

An income protection policy will pay out up to the benefit limit selected, but only after deducting other monies you are still getting, including;

• Ongoing payments from your employment such as sick pay or wages

• Ongoing payments from self-employment

• Any pension payment that starts on the date of incapacity

• Any other insurance payments from another policy or a policy from an employer.

• Dividends from shares etc.

Some insurers will" convert " benefits in kind such as a company car, living accommodation or private medical insurance to a salary equivalent which is used in calculating what will be paid out.

Payments are not usually reduced for;

• Social Security benefits

• Income Support or other means tested benefits

• Investment Income

One of the common complaints to the Financial Ombudsman Service is when people whose earnings stop, discover that their income protection plan will not pay out in full because part of their claim is also covered by a payment protection policy to cover monthly credit card, loan or mortgage payments. So check what other policies you have before deciding what cover you need on an income protection policy.

Terminal illness benefit

Some policies have an extra optional or included benefit. If you are diagnosed with a terminal illness, which is likely to lead to your death within 12 months, the insurers will allow you to take a period, e.g. six months, of benefit as a lump sum. If you take this the policy usually ceases. Unlike a life policy, insurers do not wait until you die to pay out.

Life and other policies such as the new Pension Term Assurance breed of policies, increasingly have a " Terminal Illness " benefit, which automatically pays out the sum insured or part of it, if you are diagnosed with a terminal illness.

Death benefit

Most income protection policies do not have a death benefit. Some will pay a death benefit based on 12 times the monthly benefit, if you die within 12 months of being claiming. Having a death benefit does not make them life policies.

Waiver of premiums  benefit

A waiver of premiums benefit may be included as part of an income protection plan or available for an extra charge. As your policy is ongoing, you still have to pay your monthly premiums if you are not working due to incapacity. This will apply even during the weeks or months of claiming.

A waiver of premium benefit effectively pays the insurance premium for the days/weeks you are ill.

Rehabilitation benefit

Insurers recognise that just paying cash is only one element of helping to protect income. Increasingly, income protection insurance providers are looking to include either in the policy or in their service to those unfortunate enough to claim, some form of rehabilitation assistance. This may include help in getting physically better, retraining, and assistance in getting a new job.

A new trend is for insurers to include some form of proportionate benefit, to pay a partial income if the person goes to work on a part-time basis. This accepts that few people can suddenly go from having months or years away from work, and instantly return to full time work, particularly if they have some form pf permanent disability.

House Persons benefit

Even if your partner has no paid work; the work that he/she does around the home may be of major financial benefit. So, unless you could afford to pay someone else to do all their work, then seriously consider including them in the policy or buying a separate policy.

The aim of a house person type policy is to pay for employing help, buying any special aids, converting the home

As income and ability to do an occupation are both confusing factors on houseperson cover they are not used. Payment is by a weekly or monthly set benefit .The basis for claiming is when a person no longer has the ability to perform certain daily activities; ranging from an inability to walk up to complete dependency.

What about tax on income protection plan payments?

Tax is a very complex subject where the rules can be changed by the government almost instantly. A lot also depends on the individual interpretation by the local Revenue.

In current practice, benefits are not usually taxable. But different rules may apply if you are a High Income taxpayer or not a permanent resident of the UK.

When should monthly income protection plan benefits start?

No income protection policy will begin to pay out until you've been off work for between 4 to 6 weeks. A policy, which pays out after four weeks, will be far more expensive than one, which pays out after 6 months. So, choosing a longer "deferred period" can dramatically cut your monthly premiums.

If an employee, check how long your employer will pay you sick pay (one/three/six months?) and then work out how long you can survive without your income by relying on limited State benefits, savings and other assets.

Income protection benefits will not be paid for any period during which you're receiving sickness benefits from your employer.