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Protecting what pays for everything: your income

Why you should consider Income Protection

You may think that you do not need to worry about Income Protection, but the fact is that in the UK there are over 11 million people with a limiting long term illness, impairment or disability and 1 in 7 working age adults suffer from a disability 1. The reality is that for most people, state sickness benefits would be unlikely to cover the outgoings of the average family.

If you cannot work because of illness or disability, income insurance will pay up to half to two-thirds of your pre-tax income. If you have no income, you may still be able to take out a policy, but the maximum payout will be limited.

The cover normally lasts until you are aged 60 or 66, but the insurance can be arranged for much shorter periods – say five or ten years and this cover is normally cheaper because it is substantially less valuable. The chances of having a serious illness or disability increase substantially as you grow older.

Exclusions

Almost all illnesses are generally included in the cover, but most have a few excluded illnesses. It is always worth checking conditions and exclusions on policies for example if the illness is caused by drug or alcohol abuse.

There is also an important difference between being covered for being unable to work at your own occupation and cover for being unable to work at any occupation. It is much better to have the first type of cover, even though it is likely to be more expensive.You will get the best terms if you work in an office, mostly indoors and do little or no manual work.

Inflation protection

It is normally advisable for income protection insurance to be inflation protected otherwise if the benefit payments never increase after you fell ill and could not work, their real value would be gradually eroded over the years.

Underwriting

Insurers are careful when people first apply for income protection insurance. If you have a health issue, the insurance company may exclude the particular problem, or they may increase the premium or possibly decide not to insure you. Insurers also pay considerable attention to your occupation. The cover is much more expensive for people with hazardous occupations.

Claiming

If you have to make a claim under the policy, the insurance company will continue to pay you the benefit until you are well enough to return to work. Then if your illness recurs, they should start paying the full benefit again. Unsurprisingly they will want to check from time to time that claimants are genuinely incapacitated.

Income protection can appear relatively expensive, but can be very valuable if you fall seriously ill.

The levels and bases of taxation and reliefs from taxation can change at any time and are generally dependent on individual circumstances.

1Source: Taxbriefs, May 2015

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