Income Protection Insurance

AS recession looms, it’s essential that you have some protection insurance in place to cover you if you can’t work because of illness.However, choosing the right type of insurance and avoiding wasting money on the wrong type is not easy, particularly with so many products on the market.But before you decide what type of protection insurance to buy, you need to know how much you are entitled to from the government and, if you are employed, how much you’ll get from your employer.

SICK PAY: THE STATE

If you can’t work due to illness or disability, you’ll get some government assistance, but benefits alone will be difficult to live on. What you get differs if you are employed or self-employed. Statutory sick pay (SSP) Only employees are entitled to SSP. If you are off work for four or more days, you’ll usually be entitled to SSP, which currently pays £75.40 a week for up to 28 weeks.

Employment allowance If you are still sick after 28 weeks you’ll be assessed to see if you are eligible for a new state benefit that came in last October called Employment and Support Allowance (ESA). The assessment period lasts for 13 weeks, and during this time you’ll receive an amount broadly in line with Jobseeker’s Allowance – currently around £60 a week for people over 24.If you are assessed as being capable of doing some form of work, you’ll be entitled to claim ESA of currently £84.50 a week until you can get back to work. However, if you’re assessed as not being able to return to work you’ll receive (currently) £89.50 indefinitely.The self-employed go straight into the 13-week ESA assessment period.

SICK PAY: EMPLOYER

By law, employers only have to pay SSP, but many are more generous than that. Many pay your full salary for a period of time (four weeks is common) and then possibly half pay after that. Some offer a group income protection policy.It’s important to find out what your sick pay entitlement would be from your employer, before taking out any private insurance, as there is no point in paying for insurance you don’t need.So what extra cover do you need, and how can you get the maximum protection for the minimum outlay?

INCOME PROTECTION - WHAT IS IT?

Income protection (IP) is the insurance that most people should have and few do. With IP, you receive a monthly tax-free income (often around 50 per cent of your salary) if you can’t work because of illness, accident or disability. IP continues to pay the income until the end of the policy term (normally retirement age) or until you can get back to work, whichever comes first.

HOW IT WORKS

With all IP policies you have to be off work for a certain amount of time before the policy starts to pay out. This is called the *deferred period’.The shorter the deferred period – the usual choices are four, 13, 26 or 52 weeks – the higher the premium.It makes sense to use an IP policy to *top up’ the benefit you get from the state and your employer if you can. So, for example, if your employer will pay you full salary for six months, your IP policy should start to pay out after that.The main downside to IP is that any payment you receive is treated as *income’ and may reduce any incapacity benefit, ESA or other state benefits (but not SSP) that you are entitled to. IP provides good cover, but it can be tricky to get the deferred period and the amount of cover you need right. We recommend that you always get advice from a specialist independent financial adviser.

TYPES OF POLICIES

If you can, choose a guaranteed policy where the amount you pay each month is fixed for the entire length of the policy. Reviewable policies, where the premium you pay is reviewed every few years, are cheaper at the start, but could become much more expensive over time.Age-related policies are good for people who are classified as a higher risk – for example, women, smokers and those with riskier jobs. Premiums can be even cheaper than guaranteed or reviewable policies but will increase by a set amount each year.For more details on Income Protection

WHAT IT WILL COST

A 30-year-old, male, non-smoker in a low-risk occupation could get £1,000 a month from a Best Buy IP policy for a guaranteed premium of between £23 and £40 a month.This would last until retirement and have a 13-week waiting period. This would reduce to between £18 and £36 for a 26-week waiting period.For a 30-year-old woman with the same conditions, it would cost between £34 and £67 for a 13-week waiting period. However, a 30 year old could also get an age-related policy from £14 a month.IP should be the protection of choice for most people. It provides you with an income until you can get back to work or until the end of the policy term which is usually your retirement.It’s vital that you fit IP around your existing protection as you don’t want to pay for more insurance than you need.

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