Protecting your income

Formerly known as permanent health insurance (PHI), long-term income protection (IP) is an insurance policy that pays out if you’re unable to work due to injury or illness.

IP usually pays out until retirement, death or your return to work, although short-term IP policies are now available at a lower cost. IP doesn’t usually pay out if you’re made redundant, but will often provide ‘back to work’ help if you’re off sick.

The one protection policy every working adult in the UK should consider is the very one most of us don’t have - income protection.

Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Payments are tax-free.

IP policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the ‘deferral’ period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks.

You’ll normally get the assessment rate for the first 13 weeks:

• up to £59.20 a week if you’re aged under 25
• up to £74.70 a week if you’re aged 25 or over.

After the assessment period, you’ll be placed in one of two groups and will receive:

• up to £74.70 a week if you’re in the work-related activity group
• up to £114.10 a week if you’re in the support group.

If you have a terminal illness, you’ll automatically be placed in the support group.

How far would you get on £96.35 a week?

Unfortunately, you’d soon find out if you become too ill to work.

You might be surprised to find that Statutory Sick Pay is only £96.35 a week.

These days, that’s just enough to fill up your average family car.

So before you choose to rely on the state it could pay to get all the facts:

• Statutory Sick Pay is only £96.35 a week up to 28 weeks
• Bereavement Payment (conditions apply) is a one-off payment of £2,000, but would that cover the funeral costs?
• Widowed Parent’s Allowance is a maximum of £122.55 a week - how much would that buy for your children?

In the financial year ending (FYE) 2020, the period immediately prior to the coronavirus (COVID-19) pandemic, average weekly household spending in the UK was £587.90, down slightly (not significantly) from FYE 2019 (£603.10 adjusted for inflation), despite average income increasing modestly during the same period.

There are three types of policy that will protect your income if you’re unable to work due to illness or accident:

• Long-term income protection: This type of IP policy pays out until a fixed age, death or your return to work. It’s underwritten at the point of applying for the policy, rather than when you put in a claim. This means you’ll know exactly what you’re covered for from day one, as well as any pre-existing conditions you’re not insured for.
• Short-term income protection: Like long term income protection, this type of policy is fully underwritten when you take out the cover. However, rather than pay out until death or retirement, short term income protection, known as Stip, has a fixed maximum payout period of between one and five years.
• Accident, sickness and unemployment (ASU) cover: ASU providers may screen potential customers, but do not conduct full medical underwriting at outset. Cover tends to be cheaper than IP, but you have less certainty that you’ll be covered when you come to put in a claim. As the name suggests, ASU policies cover you for unemployment.

Once you’ve chosen the type of policy that meets your needs, there are three price bases to choose from:

• Guaranteed: The amount you pay stays the same throughout the policy term. The premium will only go up if you increase the cover. Most cost slightly more to start with, but we believe they are best if you can afford the extra cost. For a forty year-old, non smoking administrative clerk covering a payout of £250 per week, a guaranteed IP premium will typically be between £25 and £40 a month.
• Reviewable: These policies tend start a little cheaper than Guaranteed policies, but the premiums are reviewed after a set period - typically every five years - at which point the provider can increase the amount. Some insurers reserve the right to increase your premiums with as little as 30 days’ notice on a reviewable policy.
• Age-related: These policies are good for people in higher-risk jobs or for smokers because these factors aren’t always taken into account when deciding the premium. Often starting off cheaper than guaranteed and reviewable policies, the catch is that the premium will go up each year as you get older. However, unlike reviewable policies, the age-related price increases are calculated and agreed with you when you take out the policy - so you won’t be caught out by any unexpected price hikes.

Premiums vary according to your occupation, health, whether you smoke and the level of cover you need.

How your job affects what you pay

Your job often affects how much you pay for a policy, although some insurers do not differentiate between different occupations. Many insurers group jobs into four categories of risk, though some have more. For example, jobs may be divided into the following groups:

• Class 1: Professional; managers; administrative staff; staff with limited business mileage; admin clerk; computer programmer; secretary
• Class 2: Some workers with high business mileage; skilled manual work; engineer; florist; shop assistant
• Class 3: Skilled manual workers and some semi-skilled workers; care worker; plumber; teacher
• Class 4: Heavy manual workers and some unskilled workers; bar person; construction worker; mechanic