These days, planning for a rainy day is absolutely essential. We have all seen just how quickly events can change. No matter how comfortable we feel in our jobs and how secure we should be given our age, experience, or pay level, there is simply no guarantee that we won’t find ourselves in a situation that spirals out of our control. Even now as things seem like they are starting to go back to normal, we are seeing how the best laid plans can be changed or abandoned completely.
Given how many people found themselves out of work during the course of the pandemic and how many people were stuck on a seemingly endless furlough scheme, it’s hardly surprising that a lot of us have looked into Income Protection Insurance. None of us want to find ourselves out of a job and scrambling to cover our bills and other expenses and having a built-in cushion in case of emergencies is a very sensible option. Here are a few points that you should know about it.
What Does It Cover?
Income Protection Insurance, as the name suggests, offers you a pay-out in the event that you either lose your job suddenly or find yourself in a position where you are unable to continue it, such as unexpected injury or illness. There are options available that will pay out as big a chunk of your salary as 70%, and there are some available that can payout after just a week of injury or illness.
As you would expect, there are some conditions and issues that would not be covered by the scheme, although these will vary from provider to provider. For example, some insurance companies would not cover a self-inflicted injury, and claims following illness relating to alcohol and/or drug misuse may also be denied. Another point to be aware of is that any claim that you make after travelling to a politically unstable country, a country that the Foreign Office advises against travel to, or which has an active epidemic may also be rejected.
Why Is It Important?
We will leave the pandemic aside for just a moment and address just a few of the reasons why having income protection insurance is so important. Think about all those big expensive life events that we go through every year. We put a big chunk of money down on a new car. We buy a new house while we’re still waiting for the deal selling the old one to be finalised. We plan for the birth of a child. We send our children off to university. And, at some point, we’d like to go on a long holiday again!
When we do this, we commit to long periods of payments and debt, and we cross our fingers and hope that nothing unexpected happens. Even if we think we have given ourselves more than enough financial wiggle room, we know in the back of our minds that it wouldn’t take much to make things difficult for us. Losing our income through redundancy, illness or injury is the kind of event that can completely destroy any plans and budgets that you may have. There is simply no substitute for knowing that you have covered yourself as comprehensively as you possibly can. If you want to learn more, Drewberry breakdown the importance of income protection insurance and compare it to other policies.
How Do I Set It Up?
Much like any insurance policy, you will need to make a few decisions before you sign on the dotted line. You will need to think about how much of your earnings you want to protect, how long the deferral period will be (that’s the length of time that you would have to be unable or out of work before the policy starts to pay out), the age at which you want the policy to stop, the length of the pay-out period.
The latter point is important to consider because a lump sum payment may not be suitable in case of a long-term illness. It’s also important to think about the higher cost of policies that continue until the age of 70 and insuring the maximum amount of your income.
What If I’m Self-Employed, Or If I Run My Own Business?
Income Protection Insurance is still an option if you are self-employed or the director of your own business, but it will be a little fiddlier. For anyone running their own business, the most important thing will be making sure that your dividends are covered so it is worth speaking to a financial advisor. For anyone who is self-employed, you need to make sure that the amount you are insuring for is the same amount of income that has been declared to HMRC. If you over-insure yourself, you won’t be able to claim on it. It’s been a rough year for self-employed workers so anything that you can do to preserve your income is step towards better peace of mind.