An alternative insurance policy which may be better than Payment Protection Insurance is that of income protection insurance.
What is meant by income protection?
Income protection pays out a proportion of an individual’s income if they are unable to work due to such circumstances as an illness, a disability or an accident.
How much of my income will get paid out under income protection if I am unable to work?
If an individual is unable to work and has income protection in place they will usually receive a pay out of around 50% of their income.
Will I be covered by income protection if I am made redundant?
If an individual has been made redundant this will not be covered by income protection – if an individual wants to have cover in respect of being made redundant this can sometimes be added on to income protection but this will usually be done at additional cost.
In this situation it may be better for an individual to take out a separate policy to deal with loss of income due to redundancy.
How is income protection calculated?
Income protection will be calculated in much the same way as other insurance policies taking into account the specific circumstances of the individual person such as their age, gender, occupation, the current state of their health and whether they are a smoker or not.
How much an individual will have to pay in premiums will depend on how much of a high risk they are viewed as by the insurance company.
Why is income protection a better alternative than Payment Protection Insurance?
Income protection is viewed by many as a better solution that Payment Protection Insurance for the following reasons:
The cost versus benefits
Decision on when the cover starts
The duration of the income protection term
Te cost versus benefits
For most people when they take out income protection insurance they will be required to pay no more than they would do if they wished to take out Payment Protection Insurance but they will be provided with far more benefits.
Decision on when the cover starts
One of the main benefits cited when discussing the reason to choose income protection over payment protection insurance is that an individual who is the subject of the insurance cover can decide when the cover starts.
This means that they can decide if the cover is to start after four weeks, three months, six months or a year enabling the cover to be fit around the existing cover that is provided due to your employment status.
What does this mean in practice?
In practice this means that if an employer stops paying sick pay for an employee who has been absent from work due to illness after 28 weeks of that absence the individual can arrange for their income protection cover to start being paid from that date.
Does this make a difference to the price of the premium?
The longer the period before the income protection cover starts paying out will mean that the premium will be cheaper as a whole.
Duration of income protection
Income protection will also continue paying until the individual reached the end of the term – this means that in many cases it will run the term through to the retirement age of the individual – or until that individual returns to work.
What happens if an individual claims on the policy then returns back to work?
If an individual claims on the policy then returns back to work their policy will continue as it did before they claimed on the policy.
Are there any disadvantages associated with income protection policies?
For certain individuals who are regarded as high risk, the cost of standard income protection may end up being too high.
Is there anything which can be done in these circumstances?
If an individual is regarded as being high risk there are other policies which they may be able to take out called age related policies. Age related policies do not calculate the premium according to gender, occupation or whether the individual smokes so may be of more benefit to those with high risk lives.
Will payment under an income protection policy affect my state benefits?
There is the possibility under an income protection policy that the payment under the policy may affect the entitlement to certain state benefits. It is important that this is checked by an individual with their insurer or adviser when taking out a policy.
Can I obtain critical illness insurance as an alternative for income protection or payment protection insurance?
Critical illness insurance is a form of insurance that is often sold to individuals in addition to payment protection insurance; however, it is by no means an alternative to payment protection insurance or income protection.
What protection is provided by critical illness insurance?
Critical illness insurance will pay out a lump sum if an individual suffers from a serious illness such as cancer or a heart attack.
When will this prove to be useful cover?
Critical illness insurance will often prove to be useful cover in an addition to other cover as it will often enable a mortgage or other large debts to be paid off.
Why should it not be used as an alternative for Payment Protection or income protection?
Critical illness insurance will not provide an individual with a regular income while they are off work. In addition to this it will not cover an individual for more common accidents or conditions such as stress or back pain.
Therefore despite being useful additional protection it should not be used instead of a more general policy which will provide an income if an individual is no longer able to work due to an illness or disability.