Income protection insurance is intended to provide you with an income due to unemployment, illness or disability. There are a few types of cover available, and this article will outline the basic differences between each.
Types of Income Protection
The various types available are designed to cover difference eventualities. There are short-term policies which are otherwise known as 'Accident, Sickness, and Unemployment' (ASU) products. These normally pay out for a maximum of two years, whilst you get yourself back on your feet. ASU products come in various forms such as 'Payment Protection Insurance' (PPI) and 'Mortgage Payment Protection'.
For all ASU policies, it's standard for your insurer to pay you directly, so you can then go and pay off the relevant debt yourself. However, not all short-term policies have to relate to a specific debt, meaning you can simply use the additional money to fund your lifestyle if you lose your main source of income.
Long-term protection income will provide a regular income if you cannot work due to illness or disability – or at least until you are well enough to return to work. There are two distinctions between any policies on offer. A policy that specifies 'own occupation' will payout if the holder is unable to do any aspect of their job. On the other hand is the policy is 'working tasks' focused it will only payout if you are unable to carry out certain day-to-day living tasks. For example if you work on a building site and suffer back problems which prevent you from working on site, your insurer may not payout on the grounds that, - although your injury prevents you from doing your own job, you're still capable of performing the 'working tasks' specified in the policy. Bearing this in mind, it's perhaps unnecessary to mention that the latter of the two options is the cheapest type of long-term policy.
How much do I need?
If you're thinking of investing, it's estimated that you will need about 50% of your salary gross (before tax etc. is deducted). You can insure for you whole salary, but this may add unnecessary costs to your monthly premium. You can't insure for more than your salary as it's illegal to make a profit on insurance from misfortune. Think carefully about how much you'd need, taking into account all monthly expenditure for food and other living costs. Don't be tempted to underestimate how much you'll need in an effort to keep your costs down.
Check other sources first
Before jumping in, double check for any other benefits you might be entitled to. Legally an employer must payout statutory sick pay for up to 28 weeks, and even after that you'll be entitled to a certain amount of financial assistance from the state. Your employer might also have a group income protection policy in place for it's employees. If you're unsure, check with your employers HR department to get confirmation in writing.