Why Income protection? Don't gamble with your biggest asset!

Income Protection

income protection

You may think that State Benefits will protect your mortgage payments, but if you cannot work due to an accident, sickness or unemployment, you will not receive any help for at least 9 months. Following that, the most you that the state will cover is the interest on your mortgage. More importantly, you will not receive any help at all with your mortgage payments if your partner works for more than 16 hours per week or if you and/or your partner have more than £8,000 in savings.

There are Income Protection plans available through most lenders and brokers that will provide an income following a loss of income due to accident, sickness and/or unemployment (Mortgage Payment Protection Plans or MPP plans). Generally speaking, these plans will replace part of your income for a maximum of 1 to 2 years after a 'waiting period' of 30 to 60 days.

About Mortgages would normally recommend that people use these plans to protect their income against redundancy and the first year of any disability. Many of our customers effect Permanent Health Insurance (PHI) to protect their income against ill health for the longer term. The reason for this is that PHI can be tailored to your needs and circumstances to ensure that you have the cover you need, when you need it the most without having to cost you the earth.

Online Mortgage Payment Protection Quotations

Online Permanent Health Insurance Quotations

What is PHI?

Permanent health insurance is a type of insurance that pays out in the event of an illness that prevents you from working. Permanent refers to the fact that, no matter how many times you claim, the insurance company is not able to cancel your cover as long as you keep paying the premiums. This is an important benefit because although you may return to work a number of times even during a prolonged illness, the cover will still be there when you need it most - unlike most MPP plans which have to be renewed annually and may be difficult to replace once you have already claimed.

Generally, PHI will pay up to 60% of your salary free of tax either until you are able to resume work again, or until the plan expires, typically at 50, 55, 60 or 65 years of age (rather than the year or two protected by most MPP plans), or until you die.

Like other types of insurance, PHI contracts are agreed for a certain number of years, usually until retirement, or earlier by agreement.

Do you need PHI?

One way to answer this question is to quote statistics at you:

	2.4 million people are claiming Incapacity Benefit
	4 million people are living on Disability Living Allowance
	Nearly 2 million people of working age will be off work for at least six months at any time through sickness or disability.

Source - The Naked Adviser March 2004

The other way is to consider the following scenario:

If, at the bottom of your garden, you had a machine that generated £30,000 per year in crisp £50 notes; would you insure it against breaking down or being stolen? You bet you would!! That's exactly what your health is... the machine that allows you to go out and earn however much you do each year and, like all machines, the potential is there for it to break down with little or no warning.

Considering that, shouldn't the question be why wouldn't you insure your health against breaking down or being stolen?

Online MPPI Quotes

Online PHI Quotes

The next most important question is to check what your employer’s sick payment scheme is. This is because generally, PHI kicks in after your sickness scheme and/or MPP run out.

Now you have to decide on the following:

	Decide when you want your PHI to kick in: this can be at any time from 4 weeks to a year after you become ill, depending on the plan. Many people tend to start payouts as soon as their company sickness benefits end. But the longer you wait the cheaper the cost of the monthly premiums.
	Choose which type of cover you want. There are three types:

1. Level Cover: Benefits and contributions remain level through the plan term. This is cheapest, but the benefits will be eroded by inflation.

2. Increasing Claim: Benefits increase during the course of a claim. Premiums will be comparatively expensive at the outset.

3. Increasing Cover: Both benefits and contributions increase annually. You are, essentially, trying to match premiums with income, which is a bit cheaper in the long run.

	Decide how much income you want to protect. The most common rule is that the income paid out by the policy plus any other income from sources such as statutory sick pay, state benefits and any other insurance must not equal to more than three quarters of your PRE-tax earnings over the previous 12 months.
	Choose whether you want an “own occupation” or “any occupation” clause. The former means that the policy will pay out if you are unable to do your own job. The latter means it pays out if you cannot do ANY job. For example, the insurer might argue that a former steeplejack who is now in a wheelchair can still work in an office.
	As before, the better the policy the more you pay. If you take a lower paid job after a period of illness, you may only be entitled to a portion of your Income Protection benefit as the amount received would be based on the ratio of your drop in income to your original income.

Things to watch out for

	Medical evidence is often required. Cover may be more expensive for those in poor health and existing medical conditions may be excluded.
	Don’t over-insure: if total income after a claim exceeds 60% of pre-claim income, the policy will not pay out the full amount in the event of a claim.
	Many policies are reviewable. This means that if overall claims history, (not your individual ones, but those of all policyholders), are greater than anticipated, premiums can rise across the board.
	There may well be restrictions on working/travelling abroad.

Online MPPI Quotes

Online Permanent Health Insurance Quotations

Please remember that the amount of Income Protection you need should be reviewed regularly and as your financial circumstances change. If you are unsure of the amount of cover or what type of policy you require you should complete an advice request to arrange a no obligation review of your needs.

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