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How much income protection cover should I buy?

Do not buy too much cover

 

  • Benefits are tax- free so you do not need to insure for your gross income.

 

  • Typically, you can insure up to 50% to 75% of your gross (pre-tax) salary. Every insurer differs.

 

  • You may only want to cover basic costs, or just cover mortgage costs.

 

  • Even if insurers accept a policy covering say 60% of your gross earnings, if on a claim, after taking tax into account, they find this would make you better off than when you were working they will reduce the amount paid out.

 

  • The more you insure for, the higher the premium.

 

Buy enough cover

 

  • Income protection insurance was developed when most people got a simple weekly or monthly wage. With contract employees, bonuses, shift payments, overtime, benefits n kind, bonuses and dividend payments; this is no longer so simple.

 

  • You should take all payments into account. Check if insurers ignore certain items, average out over 12 months, or work on the most recent months; when it comes to paying claims.

 

How long should the cover last?

 

  • You may want to buy a policy for a fixed term of five or ten years.

 

  • Some" budget " covers or options allow you to limit cover to 12 or 24 months only to tide you over.

 

  • Cover can be arranged to extend on a renewable basis until you retire.

 

  • You can extend cover until the age you expect to retire

 

  • You may not be able to select an exact age, as insurers may limit choice to set periods e.g. 50, 55, 60, and 65

 

  • Some insurers will allow you to amend the policy if you find you are retiring later than planned.

 

  • Age discrimination laws now mean you are not forced to retire. But many insurers currently will not extend beyond 65.

 

With plans to make all of us retire later, and get paid state pensions later, exactly how insurers will deal with this changing retirement age structure is not decided, mainly because government laws on this have not got beyond the general indication stage.

 

Day One cover

This type of cover is for those who are self-employed or where the employer does not pay any sick pay. They are for those who would suffer financial hardship after only a few days off work. Rather than having to wait for several weeks or months for benefits to be paid, these pay from the first day of sickness. They tend to pay out on a weekly rather than monthly basis

 

If you want Day One cover look for a Holloway Plan.

 

Back to Day One cover

Back to Day One covers are starting to appear on mortgage, loan and income replacement policies. This means you have to wait till the 31st day of illness or unemployment, and after that the insurer pays you backdated to day one. If your illness does not last for 31 days you get no money, whereas on Day One covers you may only be sick for 4 weeks and get paid every week.

 

Level or increasing cover

As earnings and prices tend to rise over time by inflation, it is sensible to "index link" or otherwise increase your benefits so that they increase in line with inflation. Some insurers also allow you to increase the benefits either at annual review, or at any time during the lifetime of the policy. Others will only allow you to increase benefits if you can prove marriage, childbirth, salary or mortgage increase.

 

Others offer an automatic increase, by a set percentage a month or linked to an inflation measuring index.

 

Even if automatically linked, it is sensible to check every few years to ensure cover has kept in line with your income and your financial commitments.