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When life throws unexpected challenges our way, such as a severe illness or injury, the impact can be both emotionally and financially overwhelming.  While it’s never pleasant to contemplate misfortune, it’s crucial to consider how you would cope if a health issue left you unable to work.  Would your savings or workplace sick pay be sufficient to support you and your family? If the answer is no, it may be worthwhile to explore your protection options.

Why protection for day-to-day expenses matters? 

While many people prioritise protection against large debts, such as a mortgage, when it comes to their financial planning, they often overlook the ongoing day-to-day expenses.  Consider a simple scenario: should you suffer an injury or illness that leaves you unable to work for a prolonged period.  Without sufficient coverage, how would you continue to pay your regular bills – rent, utilities, groceries, and more?

To safeguard against this, income protection insurance could provide the financial security you need during recovery.  By ensuring that your essential bills are covered, this type of insurance offers peace of mind, allowing you to focus on your health rather than your finances.

A safety net for the unexpected 

Income protection insurance is a long-term safety net that provides monthly payments if you cannot work due to illness or injury.  This coverage typically continues until you can return to work, retire, pass away, or reach the end of the policy term – whichever comes first.

One of the advantages of income protection insurance is its flexibility.  You can tailor the policy to meet your specific financial needs, such as choosing when payments begin.  For example, payments typically start once sick pay ends or after any other insurance coverage ceases.  Opting for a longer waiting period can lower monthly premiums, which may be beneficial if your financial situation allows for it.

Comprehensive cover for peace of mind 

Income protection insurance covers a broad range of illnesses and disabilities, both short and long-term.  As long as your policy is active, you can make multiple claims, ensuring continuous support throughout your recovery journey.  This comprehensive protection ensures you’re covered regardless of your incapacity, giving you the security you need to manage your day-to-day finances during a difficult period.

Workplace sick benefits vs.  Income protection insurance 

Some employees are fortunate enough to receive generous workplace sick pay benefits, but not everyone has access to this.  For those who rely on state support, the financial burden of long-term illness or injury can be overwhelming.  Income protection insurance provides a tax-free monthly income until retirement age if you’re unable to work due to a serious illness or injury, ensuring that you don’t have to rely on savings or face financial hardship.

This type of insurance aims to restore your financial situation to its pre-illness state, without creating a windfall.  The maximum cover amount is typically based on your after-tax earnings minus any applicable state benefits.  This structure ensures that your standard of living is maintained even when you can’t work.

What type of income protection can I get if I am self-employed? 

For self employed individuals, the absence of work often means no income.  Income protection insurance can be customised to suit fluctuating incomes, with some policies averaging earnings over the past three years.  This provides self-employed workers with essential support during their recovery, offering a lifeline where traditional employee benefits may not be available

Is there income protection if I am a business owner? 

For small business owners, securing financial protection for key personnel can offer valuable peace of mind for both you and your team. At David Allen Financial Services, our Advisers are here to guide you in selecting the most suitable cover for your needs. One option to consider is Executive Income Protection, which provides a monthly benefit to the business if you, as the owner, or a designated employee covered by the policy, is unable to work due to illness or injury. This benefit can help maintain the employee’s sick pay without them having to depend on personal savings or state benefits.

What is the cost of cover? 

Premium costs for income protection insurance vary depending on factors such as gender, occupation, age, health status, and smoking habits.  Insurers often classify occupations based on the level of risk involved, with higher-risk jobs leading to higher premiums.

More comprehensive options, such as “Own Occupation” cover, offer the greatest protection, allowing you to claim if you cannot perform your specific job.  In contrast, policies that cover “Any Occupation” may limit claims to situations where you cannot perform any job, potentially reducing your payout.

Choosing the right policy: Level cover vs.  Inflation-linked cover 

When choosing your policy, you typically have two options for coverage:

• Level Cover: Provides a fixed monthly income, determined at the start of your plan, with no future adjustments.  However, rising inflation could reduce the purchasing power of your monthly payments over time.
• Inflation Linked Cover: If a claim is made, the monthly income increases according to the Retail Prices Index (RPI), offering protection against inflation and ensuring your income remains in line with the cost of living.

Guaranteed vs.  Reviewable Premiums 

There are two types of premiums you can choose from when obtaining income protection insurance:

• Guaranteed Premiums: These remain constant throughout the term of your plan, ensuring stability.  If you select inflation-linked cover, both your premiums and coverage will increase annually based on RPI.
• Reviewable Premiums: These premiums may fluctuate over time.  While they generally remain stable for the first five years, they can increase or decrease afterwards.  Any changes will remain fixed for 12 months before another review.

Making a claim 

The waiting period after making a claim depends on the specific policy you choose.  Opting for a longer waiting period results in lower premiums but also means you’ll wait longer before receiving your policy payments.  It’s important to remember that premiums must be paid throughout the entire term of the plan, even during the waiting period.  Your circumstances may also affect how the policy payments interact with any state benefits you receive.

Peace of mind and financial stability 

Income protection insurance provides a reliable and flexible solution for maintaining financial wellbeing during recovery from illness or injury.  Whether you are employed or self-employed, this insurance gives you peace of mind and the stability you need to focus on getting better without the added stress of financial hardship.

As the market for insurance products evolves, new options may be available to better suit your needs.  Professional financial advice is essential to ensure you choose the right cover and understand how it interacts with other benefits you may be entitled to.

Book your Free review today 

If you’re unsure about your current protection or want to ensure that you are fully covered, consider booking a free review with our team.  Our expert advisors can help assess your needs and offer tailored advice, ensuring you have the right protection in place.

Don’t wait for an accident or illness to catch you off guard.  Contact us today to arrange your free review and gain peace of mind knowing that your finances are secure, no matter what life throws your way.