Income Protection Insurance is an important insurance product for most people as it is designed to provide protection in the event of a loss of income caused by a long-term illness or injury.
How does the policy work?
If you are unable to work due to long-term illness or injury, your income protection insurance policy will pay out a tax free monthly income to help compensate for your loss of earnings. The maximum amount of benefit you can receive is based on a percentage of your gross earnings (usually around 50% of your pre-tax income). These monthly payments will continue until you are fit enough to return to work or until the end of the policy term if you do not recover.
Most of us live from one payday to the next and we need this regular income to cover monthly commitments. Even those who have savings could encounter financial hardship if they lose these regular payments for more than a couple of months.
If you are an employee and you fall ill, your employer might pay you your full pay for a few weeks or months. After that, you would probably have to rely on state benefits and this is often when the real financial problems start. This is where Income Protection Insurance comes in.
Income Protection Insurance can be tailored to suit your individual needs. For example, it is possible to alter the period before the policy starts to pay out (known as the deferment period), how much the benefits are and how long they last. Your premiums will vary based on these factors, so you need professional advice to ensure that the policy provides the cover you require at a price you can afford.
This type of cover will not pay out in the event of being made Redundant, but see our Mortgage Payment Protection Insurance section.