When trying to take out Income Protection Insurance yourself, there is often a lot of confusion about policy options would be best and the costs of the premiums and cover. This article serves to clear up some of the confusion and help you understand the types of policies you can take out.
On average in the UK, the weekly household spend according to research done by the ONS is £554.20. This is spread across a wide variety of areas and you can look further in depth in the table below.
|Average Weekly Family Spending – ONS 2017||Average Cost|
|Travel & Transport||£79.70|
|Recreation and culture (holidays, pets, tv, cinema etc)||£73.50|
|Housing (net), fuel and power||£72.60|
|Other expenditure items (Rent / Mortgage, council tax)||£72.00|
|Food and non-alcoholic drinks||£58.00|
|Restaurants and Hotels||£50.10|
|Miscellaneous goods and services||£41.80|
|Household goods and services||£39.30|
|Clothing and footwear||£25.10|
|Alcohol & Tobacco||£11.90|
Could you cover all this if you became ill or had an injury that meant you were unable to work? For reference, the maximum government sickness benefit is around £100 per week. A survey conducted by Unum showed 1 in 10 people have been unable to work due to an injury or illness for a period of 6 months or more.
This is where Income Protection Insurance comes in as it can provide a monthly benefit amount should you become ill or have an accident or injury that prevents you from be able to work. The monthly benefits can cover up to 70% of your income and will pay these benefits either until you recover, you reach retirement age or the policy reaches its end of life. The average length of a claim under an income protection policy is 7 years. These types of decisions are made when you take the policy out and different insurers may provide you with different lengths of coverage.
The costs of the premiums and the amount of cover in the benefits that are provided can differ a large amount between insurers. Having a higher level of cover will increase the cost of the premiums but extending the deferred period can lower the cost. The deferred period is how long you have to be off work before the monthly benefits will start paying out. Having a 4-week deferred period may be useful as it will only be a month before you can get cover, but changing the deferred period to 13 weeks can bring down the cost of premiums by 50% in most cases. Commonly the deferral periods given by insurers can range from 4 to 52 weeks.
There are a number of types of income protection plans as certain occupations might not be able to take some of the premium options. For example, jobs that contain a large amount of manual labour will only qualify for Age-Costed Premiums. These main premium types are:
- Guaranteed premiums
- Reviewable premiums
- Age-costed guaranteed premiums / Age-costed reviewable premiums
- Discounted premiums
Guaranteed Premiums – A guaranteed premium is where the premium stays the same price for the full term of your cover. This will only change if you increase the cover amount and the type is usually seen as the best option.
Reviewable Premiums – Every 5 years (usually) the premium is reviewed by the insurance company meaning the cost can increase significantly over the course of the policy term. When first taking out a policy, these are often cheaper than a Guaranteed Premium however they can end up costing more over the full policy term.
Age Costed Guaranteed / Age Costed Reviewable Premiums – These can also be known as Escalating Premiums as the monthly cost will increase each year as you age. These increases are more significant between the ages of 50-60 due to the risk of your health deteriorating being much larger. The difference between the Guaranteed and Reviewable age costed premiums are that a Guaranteed premium increases by a set amount which can be found from the insurer in a published table. Reviewable premiums can increase by this set rate, but the insurance company also has the option of reviewing the premiums over time to see if the policy cover is correct to suit your requirements.
Discounted Premiums – These premiums are designed to include a discount based around that the policyholder will change their lifestyle to be a healthier and possibly risk-free lifestyle. If this is demonstrated to the insurer, the discount can be up to 20%. If this is not demonstrated, then the policy will increase by small amounts each year to try and help push the policy holder to change their lifestyle.
If you would like to take out a income protection policy or would just like to discuss the best options for yourself and possibly get a quote, here at Income Protection Expert we can help. We work with some of the top unbiased and independent advisers who work with our ‘no pressure guarantee’. This means they will never pressure you to take up any policies or go further than the quote stage if you don’t want to. Why not fill out one of our enquiry forms which links can be found in the sidebar of this blog post, and we can put you in touch with one of our advisers to get you started?