Income protection insurance provides an income if the insured cannot work due to a long-term injury or illness. Also called permanent health insurance (PHI) or income replacement insurance, this coverage is offered in levels up to three-quarters of normal wages, less sate benefits. Payouts are free of tax and continue until the earlier of recovery date, policy term, or the insured reaching the chosen pension age.
A specified period must elapse before the policy will pay any benefits. This timeframe is called the deferment period and is as short as one month or as long as two years. If the insured must remain out of work after the deferment period has passed, the policy will provide monthly tax-free payments equivalent to 50 to 65 percent, or sometimes up to 75 percent, of the pre-tax salary.
Premiums for this coverage are based on coverage level, age, health and smoking statuses, and occupation. The lowest level of coverage, called “activities of daily living” or “working tasks”, pays out if the insured cannot perform certain daily tasks. “Any occupation” is a level that pays out only if the insured cannot perform any job available.
“Suited occupation” coverage offers a bit more protection, paying out if the individual cannot perform his or her own job or another job that requires similar experience and skills. If another occupation is available, the insurance company may require the insured to return to work.
“Own occupation” is the highest level of coverage and pays out when an illness or injury prevents the insured from performing his or her job. Since this is the most comprehensive coverage, it usually carries the highest premium.
Guaranteed, reviewable, and age-related are the three main categories of coverage. Guaranteed policies feature a fixed premium and coverage amount throughout the policy term. Reviewable policies feature periodic premium increases and therefore, are less expensive. Age-related policies do not base premiums on occupation, gender, or smoking status. They have the cheapest initial premiums but the payment increases each year due to age.
Reasons to Choose an Income Protection Policy
If the insured is the breadwinner in the family or is self-supporting, this coverage will be beneficial. The continuing payouts can be used to pay for essentials and ongoing expenses like utilities and a home mortgage. Self-employed individuals and some other workers do not have sick pay benefits and this coverage addresses that situation. It allows the insured to take the necessary time off from work without losing all income.
The insured determines how the ongoing monthly payments are spent. This provides the freedom to deem which expenses take priority. In addition, individuals can lower their policy premiums by selecting a longer deferment period. If they are willing to wait a year or more for payments to begin, they can often purchase this coverage at a very reasonable cost. If the insured is able to return to work before the policy term ends, the maximum financial benefit will be realized.
Drawbacks of Income Protection Policies
Income protection coverage is not cost-effective if the insured is only out of work for a short period. The deferment period may be longer than the absence from work, resulting in no payout. The monthly payout made after the deferment period is satisfied does not equal the gross monthly salary of the insured. This may present a problem for households living from paycheck to paycheck. For a single individual with no other source of income, the shortfall of cash can create financial problems.
Many companies offer a pension program that includes income protection coverage. This can affect the maximum benefit provided by a separately purchased plan. Consumers should consult with an independent financial advisor to determine the impact existing employer-provided coverage will have if an additional policy is purchased.
If the policy runs for a specified term, coverage may cease before the individual is able to resume working. This could leave the individual without any income for a period. The financial impact may be so severe that the insured must return to work before the date recommended by a physician. Otherwise, debt may accrue to a level that takes months or years to repay.
Important Facts About Income Protection Insurance
This type of insurance does not cover redundancy situations. The coverage that does carries a very similar name: income payment protection insurance. Also called accident, sickness, and unemployment insurance, this plan covers the three situations listed in its name. Some insurance companies allow individuals to select only the unemployment or only the accident and sickness components.
Unlike income protection insurance, income payment protection insurance is a short-term policy. The typical coverage period is 12 months, though some policies offer a 24-month coverage period. Coverage ends if the insured is able to return to work before this period ends. A deferment period, typically between 30 and 90 days, must be met before payouts begin.
Monthly cash benefits provided by income payment protection insurance are typically based on the mortgage payment and a percentage of gross monthly income. The two categories are mortgage payment protection insurance (MPPI) and payment protection insurance (PPI). An MPPI policy includes coverage for mortgage payments only due to inability to work. A PPI policy covers loan or credit card repayments for a 12-month period.
Deciding Whether Income Protection Insurance is Necessary
People who would be unable to pay their bills if they became too ill to work should consider income protection coverage. Employer and state benefits may not be sufficient and the longer the individual is out of work, the worse the financial situation becomes. Every working professional should have coverage that protects their income.
Even workers who are not paid, such as carers, can benefit from income protection insurance. If these individuals become ill, family members would be required to pay for care. Submit a completed online quote request form to see how affordable this coverage can be. You can compare policies and prices from the top carriers, apply for coverage today, and be protected against illness or injury.