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Have you ever been looking at your budget planner and wondered what would happen if you were unable to work because of sickness or injury? How would you meet your mortgage payments etc? Not surprisingly, most of us would struggle if this kept us from working long term. If this is the case with you then there is a common way of insuring yourself against this unfortunate eventuality.
Income protection insurance
Income protection insurance is designed to pay you a regular sum over an agreed period if you are unable to work through illness or injury (subject to some defined exclusions like self inflicted injuries or criminal acts). Confusingly, income protection comes under various different names, including 'permanent health insurance' and, 'income replacement insurance', but they are basically the same.
If you are employed...
The first thing to do is check your employment contract to see whether your company automatically pays you if you are off sick for weeks or months. The cover you buy needs to complement your employment arrangement. There's no point, for example, in having cover for the first 6 months if your employment contract already covers this already.
If you are self-employed...
If you are self-employed, you may have an unstable income that either varies month-to-month, or may stop completely with little warning. It is even more important, therefore, to plan for this event, although you may find your policy especially expensive for the same reasons.
What does "unable to work" mean?
As with all insurance, you must look closely at the small print of your policy to make sure it will pay out when you want it to. The key here is the insurer's definition of being unable to work. The three most common definitions are:
- You are unable to perform your current job;
- You are unable to perform your current job or a similar one for which you are fully qualified; or
- You are unable to perform any paid work at all.
To decide which suits you best, you must ascertain whether you'd be able and willing to change careers if you became unable to do your current job. If so, you reduce the likelihood of needing to make a claim and the income protection insurance premiums should be that much lower.
Guaranteed Fixed or Reviewable?
When deciding on your policy, also consider guaranteed fixed premiums. A guaranteed policy will mean you pay the same amount each month for the rest of your working life. There are also 'reviewable' policies, where the premiums will rise every year. This is more useful if you can only afford to pay small premiums at the moment, but you expect to be making more in future, but it may not save you money overall.
Other Money Saving Tips
Somes insurer will give you the option to widen the period after falling ill before you start receiving payments. Agreeing this with your insurer in advance may reduce your premiums, but you'll have to make sure you have some savings to tide you through a gap where you will receive no income.
Finally, if you would like to read more about this and other type of insurances then have a look at the excellent information available in the consumer's section of the Association of British Insurer's site.