Income protection insurance covers you if you’re unable to work due to illness. So if you’d struggle to pay your bills whilst on long term sick leave, it may be something you want to consider.
The exact cover you can get and the terms of the policy vary between insurers. To help you know what to look for, we’ve put together a handy list:
1. The definition the insurer uses to decide if you’re unfit for work
Depending on the terms of your policy, you may find that even though your illness prevents you from doing your day job, your insurer may still expect you to work. Here are some key terms to watch out for:
If you’re covered for ‘own occupation’, then your insurer should pay out if your illness stops you from doing your regular, day job.
If you can no longer do your regular job, but you could potentially do an alternative job that suits your education and training, your insurer may expect you to do this, and therefore refuse to pay out.
If you’re covered for ‘any occupation’ then your insurance will only pay out if your illness means you can’t work at all, in any job. This type of cover, whilst strict, has a less rigid set of criteria compared to ‘working tasks’ / ‘activities of daily living’ which we talk about below.
Working tasks or Activities of daily living
If your policy has this kind of cover, you’ll probably only be able to make a successful claim if you’ve been severely injured. This is because you have to meet a fairly strict set of criteria determining whether you are able to work.
This sort of policy tends to only pay out if you're unable to carry out basic, day to day tasks that are defined by the insurer. This includes things such as whether or not you can get yourself dressed or if you can climb the stairs. Different insurers will decide which tasks you have to try, and how many tasks you’ll need to 'fail' on before they will agree that you’re unable to work.
For example, if you have a manual job and you injure your back, your policy provider may not pay out if you can still walk to the shops. This is because you’re still able to carry out a task on their pre-defined ‘working tasks’ list, even though you can no longer do your own job.
You should also check whether or not your policy covers self-employment if that’s relevant to you.
2. What’s covered and what’s excluded
Before you take out an income protection policy make sure you’re completely aware of the types of illnesses and events that are covered, and what kind of illnesses are excluded. For example, self-inflicted harm, pre-existing conditions and pregnancy are usually not covered.
While you may be focused on physical injuries, you may also want to look at mental health cover. It’s estimated that each year one in six workers in England and Wales are affected by anxiety, depression and unmanageable stress*. So if this is something you want or need to be covered for, check your policy carefully.
3. The benefit amount
When you're arranging your policy, you will be able to decide on the ‘benefit amount’ you receive should you make a claim. The 'benefit amount' is the amount of money paid out by the insurer each month.
The benefit amount will be a proportion of your income. Usually you can get up to around 65% of your gross monthly salary (before any taxes or deductions are taken).
The higher the benefit amount you have on your policy, the more expensive your premium will be. So before you finalise your policy, it’s worth working out how much you'd need get paid each month in order to get by (consider the costs of your regular outgoings such as mortgage and bills). If you decide to go for a lower benefit amount in the immediate term, you may find yourself under-insured should you need to make a claim.
4. The waiting period
Unlike other types of insurance, income protection policies can make you wait for a payout after you’ve made a claim – this is called a deferred payment.
The exact length of time you’ll have to wait for a payout is agreed when you take out the policy. Typically, the shorter the waiting period on your policy, the higher the premiums you’ll have to pay.
Before you agree on your waiting period, you may want to check the amount of time your employer will cover you for sick leave. If your employer covers you for several months, you may be able to afford a slightly longer waiting period.
5. The benefit period
The ‘benefit period’ is the amount of time you will receive payments from your insurer.
There are two types of income protection policies, long term and short term. Each type will pay out for very different lengths of time.
A short term policy will typically have a benefit period of around 12 months. After those 12 months the insurer will stop your payments.
Long term policies will usually continue to pay out until you can return to work, no matter how long that takes. If you’re unable to ever return to work, long-term policies will pay out either until the end of the policy term, until you retire or even until you pass away – depending on which event happens first.
*Numbers from mental health charity, Mind.