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Income Protection Guide

What is income protection insurance?


Formerly known as permanent health insurance (PHI), long-term income protection (IP) is an insurance policy that pays out if you're unable to work because of injury or illness.


IP usually pays out until retirement, death or your return to work. IP pays out if you're made redundant - but they will often provide 'back to work' help if you're off sick.


An income protection policy is designed to help you keep up with any mortgage or debt payments you may have, as well as to keep up with day to day spending, if for whatever reason you are unable to work.


The loss of income that can occur when an accident or sudden bout of ill health strikes can be devastating for many of us, particularly when we have regular payments to keep.





Why do I need IP?


Only a minority of employers support their staff for more than a year if they're off sick from work. Given the low level of state benefits available, everyone of working age should consider IP.


Millions of us have policies such as private medical insurance and payment protection insurance, sold to us over the years by salespeople who convinced us we needed protecting. However, while they were right about the protection, they were often wrong about the policies.


The one protection policy every working adult in the UK should consider is the very one most of us don't have - income protection.


How much does income protection pay out?


Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Payments are tax-free.


IP policies pay out only once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the 'deferral' period chosen, the lower your premiums. Your broker will look at your circumstances, specifically sick pay you receive, when working out your deferral period.


Most IP providers report paying high proportions of claims made to them. For 2015, insurance giant Aviva published that it had paid 92.4% of IP claims, while LV paid 92%. British Friendly paid out 96.7%.





Is income protection expensive?


The cost of your policy will depend on various factors about your health and the nature of the cover you require – including how long you want to be covered for.


A 25 year old requiring cover until the age of 60 will pay around £10-15 a month if they choose the maximum 12 month deferral period. If you choose the minimum (4 week) deferral period, you can expect to pay £20-40.

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