Income protection insurance is essential for all people who would suffer financially if they were unable to earn income from working. This includes single people whose own lifestyle would suffer if they were unable to earn income as well as people who have financial dependents, such as parents.

The concept of income protection insurance is simple. A client purchases a policy and if the client becomes unable to work due to illness or injury, the insurer will pay them a benefit.

Different policies have different terms. Some policies will only pay benefits for a relatively short period of either two or five years. Other policies will pay benefits up to a predetermined age, such a 60, 65 or (in relatively rare cases) 70.

The amount of income to be protected can either be agreed at the time the policies taken out (known as an agreed value policy) or can be calculated at the time of the illness or injury (known as an indemnity policy. Either way, the insured person needs to prove to the insurer they were in fact receiving income when they became ill or injured.

Generally, there will be a waiting period between the first point at which a person becomes unable to work and the point at which benefits will start to be paid. A standard waiting period is 30 days, but this can be shortened as little as 14 days or extended to periods such as 60, 90, 180, 360 or 720 days. Obviously, the longer the waiting period, the longer it will take for benefits to begin to be paid. Relatively few illnesses or injuries have such long-lasting effects. Therefore, the likelihood of an insurer paying a benefit on a policy with a longer waiting period is reduced. Accordingly, longer waiting periods often have lower premiums associated with them.

However, the whole point of insurance is to protect the insured person against the effects of illness or injury. Therefore, a longer waiting period should only be taken out if a person is able to finance a shorter duration illness or injury themselves. Shorter waiting periods are appropriate where there isn’t any such assistance.

Sometimes, an insurance policy will be offered with exclusions or loadings. As the name suggests, an exclusion occurs where the insurer stipulates an illness or injury for which they will not pay a benefit. Typically, these are pre-existing illnesses/injuries or illnesses/injuries that have a high probability of occurring. A tradesman with a history of back complaints, for example, will often have exclusions placed on any back related injuries.

At the time that an insurance policy is taken out, the insurer asks the insured person a comprehensive set of questions about their health. The insurer may ask the insured person to attend for a medical examination as well. It is very important that an insured person always tell the truth at this point, as the law generally allows an insurer to avoid payment on a policy where an insured person has not been honest with the insurer.

If you would like to know more about income protection insurance, then please don’t hesitate to get in touch.

Cheers,

Daniel