The protection market can be very complicated to even the most experienced customer and Income Protection (IP) is one of the more complex products out there.
Due to the current financial turmoil more people are becoming concerned about protecting their debts and lifestyle, so LifeSearch have put together their Top 10 tips on how to pick through all the options and choose the best policy for this important but undersold product.
1. Don't confuse it with MPPI (Mortgage Payment Protection Insurance, also known as ASU).
In comparison with Income Protection policies, MPPI plans can be greatly inferior and may even cost you more. Typically speaking MPPI plans only pay out for one year, include a number of important exclusions and both the premiums and the conditions of the policy can be changed at short notice.
2. Check the occupation class
The occupation class is the most important part of an income protection policy as this is what the insurer uses to decide whether or not to pay your claim. A range of different definitions are available.
The most comprehensive are known as ‘Own Occupation' or ‘Suited Occupation' with ‘Any Occupation' being the least advised purchase. Own occupation means you can make a claim if you are unable to perform your own job. Being covered under Any Occupation means that you have to be unable to perform any job, this can include working from home stuffing envelopes, or stacking shelves at the supermarket, equivalent earnings to the job were doing before are not taken into account.
3. Check what other benefits you are entitled to
It is vital to know the other benefits you are entitled to, as these will affect the amount that any insurance policy pays out. Do you know how much the state and how much your employer will pay you, and how long for? The longer you are paid for sickness through your employer the longer your deferment period should be, which reduces the cost of your premiums.
4. Guaranteed rates
Your premiums might seem cheap today but will they stay that way? A guaranteed rate gives you the peace of mind that no matter what happens throughout the term of your policy the price will remain the same, even if you make a claim and return to work, your policy will carry on at the same price as before. If you choose reviewable rates be aware that even though they start off cheap you have no idea how expensive they could become in the future.
5. Amount of cover
Typically you can insure up to 65% of your gross salary free of tax. But how much do you need each month to live on? Make sure you take into account all that is reliant on your salary; mortgage, food, bills and children's school fees for example. So you do need to thoroughly work out how much you essentially pay out and how this tallies with your salary. It is pointless to choose a random figure to insure yourself for at claim stage it may not pay out if you are insured for too much.
6. Deferred period
Income Protection policies will begin to pay out after you have been unable to work for a set period of time. This time period is up to you and ranges from 4 weeks to 2 years. The longer the waiting period the less expensive insurance policies will be. How long could you survive financially without your income? You need to find out how long your employer pays sickness for, as your Income Protection policy cannot pay out at the same time you are receiving employee benefits.
Whilst most insurance policies can be linked to inflation it is particularly important to make sure Income Protection increases with inflation as your earnings typically would do also. £1000 a month might seem plenty of cover for now, but in 20 years’ time it won’t pay for the same standard of living.
8. Consider unemployment cover
Income Protection policies do not automatically cover unemployment, although with most providers this can be added at an additional cost.
Unless you are particularly concerned about unemployment, it may be worth placing the money that would have been used to pay the additional premiums in a savings account rather than taking out cover.
Just because you don't work this doesn't mean you cannot insure an income. Think of the costs incurred, for example, if you are not employed but stay at home to care for children, and then are unable to do so through illness or accident. Childcare is costly and many families would be unable to cope with the added expense. House persons can typically be insured for up to £15,000 per year.
10. Consider critical illness cover
Always consider the alternatives. Critical Illness could be more suitable for your specific circumstances. We recommend that you always shop around to ensure you have been given information on all products suitable for your situation.
Matt Morris, LifeSearch Policy Adviser, says, "Almost everyone needs some form of protection and for many, their income is the most valuable asset they have. State Benefits are a very basic safety net and only really support those on low incomes. Also, the Government intends to make it much harder to claim in the future.
"For most of us, the nightmare scenario must be discovering that not only have we been diagnosed with a long term illness, but the realisation that income is going to dry up in a few weeks as well. Peace of mind is a few pounds a week spent on a good income protection policy."