True income protection is not the only policy available that can provide a replacement income, so it is only reasonable to consider the pros and cons of these alternatives. The alternative policies are known by a range of names but are in essence very similar in terms of the benefits they provide. Common names are shown below:
- mortgage payment protection insurance (MPPI)
- accident sickness cover (Accident, Sickness & Unemployment)
- payment protection insurance (PPI)
- short term income protection (STIP)
You may feel that you do not need any form of income replacement in the event that you were unable to work, as you have accrued substantial savings through your own hard work. However, there are two important questions to consider if you are in this position.
Firstly, with the average income protection claim lasting seven years, would your savings cover all of your monthly outgoings for that period of time or even much longer?
Secondly, even if they could, would you really want to spend all of your hard earned savings because of an unforeseen accident or illness and have to start saving again from scratch?
If you’ve worked hard to build up substantial savings doesn’t it make sense to protect them against adversity?
The bank of mum and dad
You may have parents or other relatives that would help out financially in the event that you were unable to work. Unfortunately however, most parents do not consider the likelihood that they would be required to help out for seven years let alone through to your retirement age and the reality is that often they would be financially unable to do so, so it is a risky option for most people.
Critical illness cover
While there is undoubtedly a place for critical illness cover, it would be sensible to consider it only once income protection has been taken. The reasoning behind this statement is that a correctly set up income protection policy will cover all of your essential outgoings, including your mortgage payment, through to your retirement age in the event that you are unable to do your own job for any medical reason.
A critical illness policy will pay out only in the event of you suffering one of the designated conditions but would pay you nothing if you are unable to work for musculoskeletal or stress related conditions, which are common long-term claims under income protection. If you can make a successful critical illness claim, that typically leaves the mortgage paid off but no source of income to cover the remaining essential monthly outgoings such as food, utilities, car expenses etc. Or put another way, what’s the point of paying off your mortgage if you can’t afford to live in the house?
The best way to illustrate how Income Protection protects you against more circumstances than Critical Illness Cover is to examine what Income Protection providers typically pay out for, shown below.
The chart below shows the main reason for claims from a major income protection provider.
It is well worth noting that around 60% of the claims paid out for this insurer would not have triggered a pay-out from a critical illness policy. For some insurers this figure is as high as 75%, which is why we believe income protection offers superior illness cover to critical illness.
Rely on the state
Disability living allowance in 2014 will pay an absolute maximum of £598(1) per month if you qualify for the highest tier of benefit for both the disability and mobility component, which is not guaranteed.
Only 37% of new disability benefit claims were paid to the end of 2013(2) when eliminating claims involving terminal illness (which are fast-tracked).