Income Insurance UK

Income Protection Insurance
 
What is income protection insurance?
 
An income protection policy is designed to provide the policy holder with a replacement source of earnings if they become too ill to work. Income protection insurance is therefore similar to critical illness insurance. The main differences are that (i) income protection insurance is specifically linked to loss of earnings due to an inability to work and (ii) income protection insurance policies pay out regular tax free amounts rather than a one off payment (as is the case for critical illness insurance policies).
 
It is estimated that around 2.5 million people in the UK are currently receiving some sort of incapacity benefit. These are people who are unable to continue in full time employment and who would have benefited from income protection insurance had they had it at the time they became too ill to work.   
 
There are three basic types of income protection insurance:

(i) policies that replace a proportion of lost earnings if you become too ill to work
(ii) policies that cover certain living expenses (eg the mortgage) if you become too ill to work; and
(iii) policies that provide benefits to housepersons
 
The type of policy that is suitable for you will obviously depend upon your circumstances and any alternative sources of income you have (eg savings).
 
When does income protection insurance pay out?
 
Like most other types of insurance product, an income protection policy requires the policy holder to make regular payments to the insurance company in return for the insurance company agreeing to pay out in certain defined circumstances. These circumstances vary from policy to policy. However, the most common triggers for payment under a critical illness policy are those listed below:

 - own occupation - you are entitled to claim from the insurance company if you are no longer able to work in your own occupation
 - any occupation  - you can claim from the insurance company if you are unable to work in any occupation
 - any suited occupation - you can claim if you unable to work in your previous occupation or any other occupation for which you are suited (eg by virtue of your academic qualifications)
 - activities of daily working - you can claim if you are unable to perform certain pre agreed work related activities (eg walking, communicating etc)
 - activities of daily living - you can claim if you are unable to perform certain pre agreed tasks relating to daily living (eg dressing yourself)

Cost
 
The cost of a critical illness policy will vary depending on which of the definitions listed above applies. An 'own occupation' policy will tend to be more expensive than, say, an 'any occupation' policy. But your age, sex, medical history and - crucially -occupation will also be important factors in determining the cost of your policy. Clearly stuntmen and lion tamers will pay more for critical illness insurance than librarians and accountants. In fact if your occupation is deemed by the insurance industry to be particularly dangerous you may find you are unable to take out any form of critical illness insurance.
 
One way of reducing the cost of a policy is to lengthen the deferral period which applies to payments by the insurance company (see below for explanation).

Other useful information
 
There are a number of other things you should know about before you take out a critical illness insurance policy.
 
- most policies will only pay out benefits some time after a qualifying injury or illness has occurred. This is known as the 'deferral period'. Deferral periods will vary from one policy to another. Before taking out critical illness insurance make sure you know how you would fund yourself for the duration of this deferral period. It may be that your existing employer will continue to pay you for a period of time even if you are no longer employed there. So check this first. 

- whatever type of critical illness policy you have you will not be able to obtain full cover for loss of earnings. Insurance companies always limit the amount they will pay out to a percentage of salary. This is to encourage - where possible - those receiving payments under a critical illness policy to return to work. Note also that payments under a critical illness policy are tax free so you need to look at your net not gross salary when making comparisons    
 
- there is not normally any limit on the number of claims you can make on the same policy
 
- it is normally advisable to link the duration of your critical illness policy to the likely date you will receive a pension from your employer

- the premiums attaching to critical illness policies can be structured in one of three ways:
 
(i) guaranteed rate agreements where the premium is fixed for the duration of the policy (subject only to, say, inflation indexation)
(ii) reviewable rate agreements where the insurance company can change the premium in the light of other claims and/or its own costs
(iii) renewable rate agreements where premiums are reset by the insurance company after regular intervals
 
- some policies offer inflation adjusted benefits (ie payments are indexed to inflation). Check whether this applies in your case