Income Protection Insurance - 5 Costly Mistakes You Could Make When Buying a Policy
Income protection insurance is designed to replace your monthly income if you are unable to work through accident, sickness or unemployment. When you consider how important your income is to your lifestyle, it is surprising that so few people protect themselves with this type of insurance. Unfortunately, the industry jargon that surrounds the product can sometimes confuse people, and lead them to purchase the wrong type of policy. Here are 5 costly mistakes to avoid when buying income protection.
Choosing a budget policy
Keeping costs down is something that most of us are concerned with, but when it comes to income protection it should not be the most important factor. Income protection is not a once size fits all product, and the premium price will vary hugely from person to person.
When finding a policy, you can choose to protect a portion of your monthly salary, usually up to 70%. For example, if you earn a yearly gross salary of 30,000, you can expect to be paid a maximum of around 1,800 depending on insurer. However, a budget policy may only pay out a small amount of money, like 500. Whilst this may make the premiums lower, you will lose out in the future if you cannot maintain your current lifestyle on that sum. Make sure you take into account all of your essential monthly outgoings such as your mortgage, bills, council tax and food.
Another way costs can be cut is through a long deferred period. A deferred period is the amount of time between you being unable to work and the insurer paying out. Whilst a deferred period of 52 weeks will have much lower premiums than a 4 week deferred period, you may not be able to survive financially for that amount of time and end up out of pocket. Choose a realistic deferred period that takes into consideration how long you could actually survive without an income.
Not covering yourself for long enough
There are two main types of income protection policy- short term and long term. Short term policies will only pay out for a maximum of 12 months, even if you unable to return to work after this time. Long term policies will pay out for as long as you need, up until retirement if you choose.
Short term policies are in some cases cheaper than long term policies. However, they may not be the wisest choice if you are looking for peace of mind. For example, if you hurt your back and were unable to return to work, a short term policy would replace your income for 12 months. If you were still incapacitated after that time, you would receive no more money. Conversely, long term policies can pay out until you either get back to work or you reach retirement age, whether that be 5 years away or 25 years away.
Someone who has been off sick for 6 months or longer has an 80% chance of being off work for 5 years, so a long benefit term could be a sensible investment, and it may not cost much more.
Choosing the wrong 'occupation'
This is where income protection can get a little complicated, but it is essential that you familiarise yourself with the jargon if you want to invest in a policy. With a long term policy, incapacity will be defined on one of the following basis:
Own occupation - the policyholder is incapacitated if they are unable to perform their own occupation and are not working in another job.
Suited occupation - the policyholder is incapacitated if they are unable to perform an occupation suitable to them given their education and training.
Any occupation - the policyholder is incapacitated if they are unable to perform any occupation at all.
Activities of daily living (ADLs) - the policyholder is incapacitated if they are unable to perform a number of defined functions such as dressing and undressing, washing, eating, climbing stairs, shopping, cooking etc.
Own occupation policies are the most desirable, because they offer the greatest level of cover. With own occupation policies, you will receive your benefits as long as you are unable to carry out your own job. However, for very manual or risky occupations most insurers will not offer the own occupation definition of incapacity.
Talk to an income protection insurance broker to find out more about these definitions.
Lying on your application form
When investing in income protection insurance it is likely that you will have to answer questions about your health, your family history and your smoking status. Your answers to these questions will have an impact on the cost of your premiums.
But whatever you do, do not be tempted to tell a little white lie at the application stage. When you come to make a claim and your insurer finds out you failed to disclose all information, they will render your claim invalid, you will not be paid and your premiums will not be refunded. There are other ways to bring the cost of your premiums down without lying on your application.
Choosing an unethical company
When looking for income protection insurance it is a great idea to use a comparison website to get a good idea of the market. However, always check that the website you are using is an FSA authorised broker, with its number clearly displayed at the bottom of the page. Some websites will simply take your details and sell them on, without giving you any quotes or information at all. An FSA registered broker will be able to compare the whole market and give you unbiased advice on a policy that suits you. They will also be able to help you with the claims process in the future.
Chloe Hibbert writes for ActiveQuote, a website where you can compare income protection insurance quotes and health insurance quotes online.
Choosing a budget policy
Keeping costs down is something that most of us are concerned with, but when it comes to income protection it should not be the most important factor. Income protection is not a once size fits all product, and the premium price will vary hugely from person to person.
When finding a policy, you can choose to protect a portion of your monthly salary, usually up to 70%. For example, if you earn a yearly gross salary of 30,000, you can expect to be paid a maximum of around 1,800 depending on insurer. However, a budget policy may only pay out a small amount of money, like 500. Whilst this may make the premiums lower, you will lose out in the future if you cannot maintain your current lifestyle on that sum. Make sure you take into account all of your essential monthly outgoings such as your mortgage, bills, council tax and food.
Another way costs can be cut is through a long deferred period. A deferred period is the amount of time between you being unable to work and the insurer paying out. Whilst a deferred period of 52 weeks will have much lower premiums than a 4 week deferred period, you may not be able to survive financially for that amount of time and end up out of pocket. Choose a realistic deferred period that takes into consideration how long you could actually survive without an income.
Not covering yourself for long enough
There are two main types of income protection policy- short term and long term. Short term policies will only pay out for a maximum of 12 months, even if you unable to return to work after this time. Long term policies will pay out for as long as you need, up until retirement if you choose.
Short term policies are in some cases cheaper than long term policies. However, they may not be the wisest choice if you are looking for peace of mind. For example, if you hurt your back and were unable to return to work, a short term policy would replace your income for 12 months. If you were still incapacitated after that time, you would receive no more money. Conversely, long term policies can pay out until you either get back to work or you reach retirement age, whether that be 5 years away or 25 years away.
Someone who has been off sick for 6 months or longer has an 80% chance of being off work for 5 years, so a long benefit term could be a sensible investment, and it may not cost much more.
Choosing the wrong 'occupation'
This is where income protection can get a little complicated, but it is essential that you familiarise yourself with the jargon if you want to invest in a policy. With a long term policy, incapacity will be defined on one of the following basis:
Own occupation - the policyholder is incapacitated if they are unable to perform their own occupation and are not working in another job.
Suited occupation - the policyholder is incapacitated if they are unable to perform an occupation suitable to them given their education and training.
Any occupation - the policyholder is incapacitated if they are unable to perform any occupation at all.
Activities of daily living (ADLs) - the policyholder is incapacitated if they are unable to perform a number of defined functions such as dressing and undressing, washing, eating, climbing stairs, shopping, cooking etc.
Own occupation policies are the most desirable, because they offer the greatest level of cover. With own occupation policies, you will receive your benefits as long as you are unable to carry out your own job. However, for very manual or risky occupations most insurers will not offer the own occupation definition of incapacity.
Talk to an income protection insurance broker to find out more about these definitions.
Lying on your application form
When investing in income protection insurance it is likely that you will have to answer questions about your health, your family history and your smoking status. Your answers to these questions will have an impact on the cost of your premiums.
But whatever you do, do not be tempted to tell a little white lie at the application stage. When you come to make a claim and your insurer finds out you failed to disclose all information, they will render your claim invalid, you will not be paid and your premiums will not be refunded. There are other ways to bring the cost of your premiums down without lying on your application.
Choosing an unethical company
When looking for income protection insurance it is a great idea to use a comparison website to get a good idea of the market. However, always check that the website you are using is an FSA authorised broker, with its number clearly displayed at the bottom of the page. Some websites will simply take your details and sell them on, without giving you any quotes or information at all. An FSA registered broker will be able to compare the whole market and give you unbiased advice on a policy that suits you. They will also be able to help you with the claims process in the future.
Chloe Hibbert writes for ActiveQuote, a website where you can compare income protection insurance quotes and health insurance quotes online.
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