There are two main types of earnings protection: long term income protection and payment protection. Payment protection is a short term policy providing benefit for up to two years whereas income protection can provide long term earnings cover all the way up until you retire.
Long term income protection key policy features
- The policy will pay a tax-free monthly benefit should you be off work due to sickness or injury;
- The payout from the policy can be used for whatever purpose you see fit, whether that be to cover mortgage payments or for general living costs;
- The monthly benefit will continue to be paid until you either return to work or the policy term ends;
- Policy terms can last all the way up to the national retirement age of 65;
- The monthly benefit will start to be paid after the fulfilment of your chosen deferred period, which can range from 4 weeks to 52 weeks;
- You may insure between 50-65 percent of your gross (pre-tax) monthly income.
Protection against long term sickness or injury
Long term income protection policies provide long term earnings cover against the risk of sickness and injury (incapacity). If you were to become sick or suffer an injury that meant that you had to take time off work then the policy to kick-in (after your chosen deferred period) and provide you with a monthly income.
The benefit provided can be used in any way you see fit, whether that is for mortgage repayments, living expenses, school fees or any other outgoings you may have.
Length of cover for long term income protection
Once the policy starts to payout the monthly benefit will continue until you either return to work or the policy term ends. It is a long-term policy because the term of the policy can last all the way up until the retirement age of 65 years.
This means that if you make a claim and cannot return to work again because of your illness or injury the policy will continue to make monthly payments until you reach 65 years of age. If you do return to work but then become ill again it is possible to make multiple claims on the same long term income protection plan.
Naturally, setting the policy term period equal to the national retirement age is just one option. If you expect to retire at an earlier age or do not require cover to last as long then it is possible to set a policy term period at a length that suits your specific situation, whether that be 10 years, 15 years, 20 years or longer.
Please note that the minimum term period for this type of policy is 5 years and the maximum is generally to the age of 65 although some insures are starting to offer cover to 70 years of age.
How much can be insured?
Depending on the level of monthly cover you require you can insure 50 to 60 percent of your gross monthly earnings (the amount of income you earn before tax and national insurance contributions). There is no tax on this benefit as the tax has already been paid in the form of Insurance Premium Taxation when you pay your monthly premiums.
This means that the benefit you receive each month should be sufficient to maintain your usual standard of living as it will be approximately in-line with your normal monthly net (post-tax) pay.
Setting the deferred period
When quoting and applying for your policy you will need to select a deferred period (also known as an excess period). This is the period of time before your policy will begin to kick-in and make payments after you become ill or suffer injury. If you are employed then it usually makes sense to set the deferred period equal to the amount of time you receive sick pay.
In the UK statutory sick pay is for 26 weeks and this is therefore a common deferred period. In this sense income protection is a long-term policy as the common deferred period of 6 months prevents multiple short-term claims being made.
It is possible to select a deferred period at anything from 4 weeks right up to 52 weeks, depending on your cover requirements. Naturally, if you are self-employed then you do not have the benefit of statutory sick pay and may wish to set the deferred period on the shorter end of this scale, possibly 4 to 8 weeks.
The shorter the deferred period set the higher the monthly premiums will be as it opens the door for multiple shorter-term claims and therefore increases the risk for the insurer. If you have substantial savings that could sustain your living standards for an extended period of time then you may want to set a longer deferred period to reduce the rates charged.
If you are considering this option for your long term income protection then please note that there is very little difference in the premiums charged between identical policies with a deferred period of 6 months relative a policy with a deferred period of 12 months.
This is the case because the chances of a long term claim being made after 6 months of illness or injury is statistically similar to a claim being made after 12 months.
Next steps
If you would life some advice on your long term income protection policy options or simply want to compare quotes from the UK’s leading insurers then please do not hesitate to contact us for complete your details in the quote box.
Visit our sister site a dedicated resource in income protection to retirement for further information.
