Should I protect my income?

When it comes to protecting your family and livelihood, you just can’t be too careful. It may come as a surprise to learn that only 35% of UK adults hold a life, critical illness or income protection product.

This equates to 15 million people, which may seem like a lot (https://www.fca.org.uk/publications/corporate-documents/sector-views-published-february-2020 – page 35) but comparing it to the 17.6 million who have gadget, phone or warranty products, it could be argued that UK adults are seemingly more likely to protect their gadgets than their income!

Even with only 35% of the UK adult population holding life, critical illness or income protection products, insurers still pay out £14.5million every day for claims, highlighting just how important income protection insurance can be. (https://www.abi.org.uk/data-and-resources/industry-data/uk-insurance-and-long-term-savings-key-facts/) Nobody likes to think that something bad might happen, and there’s certainly nothing wrong with that positivity day-to-day- but it’s important to be prepared in case something goes wrong. Just take the current climate as an example.

Income protection is one of the most important things in financial planning but often overlooked by many. There are various types of income protection which we’ll explore, but first it is useful to know what the statuary sick entitlement is to understand the importance of protecting your income.

Should you find yourself in a position where you can’t work, it’s likely you’d get some form of sick pay from your employer or through statutory sick pay (SSP), but in most cases SSP equates to around £94.25 a week for up to 28 weeks (https://www.gov.uk/statutory-sick-pay), which many find doesn’t match the income they’re used to, making it a struggle to make ends meet

Some employers will continue your pay during periods of sickness, this is at the employer’s discretion and isn’t guaranteed, it can vary from one week to 2 years. It may be useful to know that you can tailor some income protection policies around employer sick pay.

Income Protection

What are the different types of income protection insurance?

There are several different income protection products designed to protect your income or cover your outgoings.

Read more here

Mortgage Payment Protection Insurance policies – MPPI

Please note, this is not the widely mis-sold PPI.

Mortgage payment protection insurance policy, or MPPI is a type of protection policy that covers your mortgage and associated bills. MPPI will cover your mortgage payment, any associated life assurance and buildings and contents insurance, usually up to a limit of 125% of your actual mortgage payment if you’re unable to work. This type of income insurance product allows you to choose what kind of situation you’d like to cover that may result in loss of income due to an inability to work. You can usually cover sickness, accident or unemployment as a package or individually if you choose not to cover a certain scenario. Often insurers allow a tolerance to allow for interest rate fluctuation and may allow you to cover an additional percentage of the mortgage payment.

Accident, Sickness and Unemployment – ASU

This type of income protection is very similar to MPPI but is based on your income, rather than your mortgage and outgoings. Known as Accident, Sickness and Unemployment (ASU), this insurance helps replace and cover income that could be lost if you’re unable to work due to sickness, injury or unemployment, depending on the cover you choose.

Remember that you will only receive Statuary Sick Pay from the state if you are unable to work due to an accident or sickness, so the ASU policy adds to this. ASU can protect a percentage of your gross salary, usually around 50-70%, providing the financial support you’ll need to continue your life with a monthly tax-free (https://www.gov.uk/income-tax) cash sum until you’re ready to return to work. However, the duration of payment is normally to a maximum of two years with 12 months being the most prevalent cover available.

Is income protection like PPI?

Income protection is not the same as PPI (payment protection insurance). PPI is a type of insurance sold alongside credit agreements like loans, car finance or credit cards to make sure repayments are made if the borrower becomes unable to afford them, perhaps due to unemployment, sickness or injury. The whole scandal around PPI was that it was just added to people’s loans whether they would have been eligible to make a claim or not.

ASU income insurance is designed to protect your income and ability to pay your credit commitments and your life costs, such as food, bills, utilities and childcare. A valid claim on ASU insurance gives you a monthly, tax-free percentage of your income(https://www.gov.uk/income-tax)- allowing you to distribute it accordingly.

What does it cover?

All types of income protection insurance allow you to protect your ability to meet financial commitments in the event you’re unable to work and earn your usual income due to illness, accidental injury or unemployment. Financial commitments income protection insurance can cover include:

  • Salary
  • Mortgage or rent payments
  • Loan payments
  • Credit card repayments
  • Daily living costs
  • Other financial commitments

Some insurers allow you to protect up to 70% of your gross salary. It’s important to remember that income protection doesn’t cover life-threatening illness or death, to be insured for this you’ll need to consider critical illness insurance or life insurance.

What doesn’t it cover?

ASU and MPPI doesn’t cover everything, things that an insurance policy doesn’t cover are often termed ‘exclusions’ and it’s important to check your insurance policy to be sure your concerns don’t fall under an exclusion before purchasing it. Exclusions could include but are not limited to:

  • Pre-existing conditions
  • Critical illness
  • Some policy covers mental health, some policy excludes it. If this is something that is relevant to you it’s worth double checking whether the insurance you’ve chosen covers this
  • Normal pregnancy
  • Specific policy exclusions
  • Voluntary redundancy
  • Voluntary resignation
  • It’s essential to thoroughly check the policy of income protection to be sure that it covers the types of illness, injury or unemployment situation you might be concerned about.
  • If it is known that you may be at threat of redundancy prior to taking out the cover

Also, there is often an initial Exclusion Period or Waiting Period see below.

How soon am I covered by income protection insurance after taking it out?

Your cover starts as soon as your application is accepted, and your policy begins. Don’t forget though that your policy will more than likely include a ‘waiting period’ meaning you won’t be able to make a claim before a specified time has passed. This is normally 3 to 6 months where no claim can be made. This is to protect the insurer against large scale claims if many applicants may know that that their company could be laying people off or an applicant feels that they may have a serious illness before taking the cover. Once you have paid premiums beyond the initial “exclusion period” then you will be covered.

To find out how to get cover as soon as possible, speak to one of our specialist advisors.

You may also choose a “deferred period”, this would mean if you made a valid claim, you’d wait a period before payments would begin. You may think that you want cover immediately, however the sooner the payments are made the higher the premium, so applicants may choose a deferred period to bring down the monthly premium. You can usually select deferred periods from 4 weeks to 12 months- the longer the deferred period the lower the premium. You can sometimes opt for “back to day one” cover. This would mean that if you chose a 30-day deferred period with back to day one cover, on the 31st day, a claim payment would be made covering the period going back to day one of your claim.

It is important to understand that most MPPI and ASU insurance products go through the full underwriting process to check eligibility at the point of claim and not at application.

Can I take out long-term income protection?

Simply put, yes- but this falls into a separate category and does not include unemployment or redundancy cover. Known as Permanent Health Insurance or PHI, this is underwritten at the point of application and covers you for long term sickness or accident. You can select an end date of the cover up to your retirement age and cover up to a maximum of 70% normal take home pay minus State Sickness Benefit.

For this type of cover you would go through a full underwriting process, but once cover is given by the insurer it won’t be withdrawn or changed (even due to new health conditions)- providing you keep up your premium payments. It is worth noting application may be declined if you have a serious medical condition or have a high-risk occupation, but this can be discussed with an adviser before you apply. You will need to think about some of the points listed below, all of which will have an influence on premium prices. See more about how much income insurance will cost?

  • Employment type– many insurers will put you into a risk category according to your type of employment. For example, a low risk profession, like an office administrator might have lower premiums than a high-risk profession, like a construction worker. This is because a person in a high-risk profession is more likely to make a claim on their income protection than someone in a low risk profession.
  • Age – you can apply from 18 years year old, most insurers let you apply up to 60 but this is increasing with some insurers as people are working for longer.
  • Family medical history – insurers will want to know what your family medical history is to get a better idea of what kind of insurance they can offer.
  • General health
  • Whether you’re a smoker
  • Amount you want to cover– this will affect your premiums so insurers will want to know how much you want to protect in the event of your inability to work.
  • Deferral period– the amount of time you must be off work before receiving payments. A longer waiting period is likely to have lower premiums as opposed to a shorter waiting period, but it’s worth checking to see how much cover you might want and how soon before choosing an income protection insurance plan.
  • Benefit payment period, with PHI policies you can set the benefit payment period per claim to be 1, 2 or 5 years, or full term- which means in the event of continuous claim the insurer would pay out until the policy end date.

Who might want a type of income protection?

Anyone who would struggle to live without their regular income earned from working should consider income protection. It’s not something that many people consider until the protection is needed, but being proactive and taking steps to prepare for the possibility of injury, illness and possible unemployment can help keep you and your family financially safe should need arise.

If you’re self-employed see here.

If you’re in part-time employment see here.

If you’re unsure, speak to one of our specialist advisors at Clever Mortgages to find out if income insurance is right for you.

I work part time. Can I still take out Income Protection Insurance?

You can take out the various forms of income protection described above with part-time work. Just like income protection with full-time employment, you can protect a percentage of your income when you’re in part-time employment with an income protection insurance policy, covering you in the event of sickness or injury.

If you’re in part-time employment and want to take out income protection insurance, get in touch with one of our specialist advisors at Clever Mortgages.

Redundancy and income protection insurance

Some income protection insurance policies protect against involuntary redundancy, ASU and MPPI being the most common as described above. You can’t insure against voluntary redundancy or leaving work by resignation, but you can put protection in place so that if you experience involuntary redundancy, you’ll be able to meet your financial commitments. You’ll still most likely have a waiting period, and the payments usually only last a set period, intended to keep your financial and living costs covered while you find a new source of income. Some policy also requires you to have held it for a certain length of time, the initial exclusion period, explained above before you can claim for involuntary redundancy, often around 3-6 months.

Please note that you can’t take out unemployment protection cover if you’re aware of a situation that could lead to you being made unemployed.

How much income protection cover can I get?

To find out how much cover you might want, you can calculate your essential monthly outgoings. This could be things like:

  • Mortgage or rent payments
  • Household bills. Think about your food shops, internet bills, telephone packages etc
  • Utilities. Your gas, electric and water bills will still need to be paid if you’re unable to work.
  • Childcare costs
  • Loan repayments
  • Credit card payments
  • Essential running costs

When you add up your living costs to figure out what income protection you could use, bear in mind some travel costs, work clothes and equipment, work lunches and other associated costs might be decreased or stop if you’re unable to work.

Once you have your total, check and see how much statutory sick pay you’re entitled to or how much your employer will pay while you’re off work, then subtract this from your overall sum. This should give you an indication of how much cover you could use to keep paying your living costs in the event of being unable to work.

It’s important to remember that statutory sick pay only last 28 weeks, whereas some employer sick pay schemes can last up to 12 months so bear this in mind when choosing your cover. Your adviser will take this into account and discuss the best option.

Its also important to remember that the maximum cover you can obtain is 70% of your normal gross salary, and many insurers cap the total level of cover, which could be less than 70% depending on your salary.

How long does income protection pay out for?

This depends on the type of product you have and, with some policies, how long you choose when getting your quotation. If you make a valid claim on your income protection insurance, you could get payments until you’re well enough to return to work, unless you retire before that.

You can get long-term protection (see PHI see above) and short-term income protection insurance. Some plans will pay out until you retire, some will only last a few years, so it’s important to decide how much cover you might need and how long you might need it for.

You can also bring two options together, an ASU policy with a 12-month claim pay out period, dovetailed with a PHI policy with a 12-month deferred period and a full term pay out.

How many times can I claim?

With a traditional long-term income protection insurance policy, you can claim as many times as you need to while the policy is active.

How much does income protection cost?

The cost of your income protection will depend on the product you choose and a variety of factors -insurers will use many elements of your personal circumstances to calculate the premiums in your quotation.

  • Employment type– many insurers will put you into a risk category according to your type of employment. For example, a low risk profession, like an office administrator might have lower premiums than a high-risk profession, like a construction worker. This is because a person in a high-risk profession is more likely to make a claim on their income protection than someone in a low risk profession.
  • Age – you can apply from 18 years year old, most insurers let you apply up to 60 but this is increasing with some insurers as people are working for longer.
  • Family medical history – insurers will want to know what your family medical history is to get a better idea of what kind of insurance they can offer.
  • General health
  • Whether you’re a smoker
  • Amount you want to cover– this will affect your premiums so insurers will want to know how much you want to protect in the event of your inability to work.
  • Deferral period– the amount of time you must be off work before receiving payments. A longer waiting period is likely to have lower premiums as opposed to a shorter waiting period, but it’s worth checking to see how much cover you’ll need and how soon before choosing an income protection insurance plan.
  • Benefit payment period, with PHI policies you can set the benefit payment period per claim to be 1, 2 or 5 years or full term, which means in the event of continuous claim the insurer would pay out until the policy end date.

Get in touch with one of our specialist advisors at Clever Mortgages to get a (free?) quote on your income protection insurance.

Self-employed income protection

If you’re self-employed, you don’t have access to statutory sick pay as you don’t have an employer and, without income protection insurance, would have to apply for ESA. https://www.gov.uk/employment-support-allowance) Because of how the new Universal Credit

system works, it’s likely you’d have to apply for that and claim ESA within Universal Credit. After completing an assessment, you’d be eligible for up to £73.10 a week if you’re in the work-related activity group or up to £111.65 a week if you’re in the support group (https://www.gov.uk/employment-support-allowance/what-youll-get).

If you’re self-employed, it’s advised that you consider income protection insurance to protect some of your income in the event of sickness or injury. Income insurance for self-employed workers usually offers cover for around 50%-70% of your income, just like regular income protection insurance.

Are you self-employed and want to protect your income? Get in touch with one of our specialist advisors at Clever Mortgages to take the first step towards protecting your livelihood.

Critical Illness Insurance

What is critical illness insurance?

Critical illness insurance is a type of protection insurance that provides you with a tax-free lump sum if you’re diagnosed with any of the injuries, illnesses or medical conditions covered in your policy. It’s designed to give you and your family peace of mind financially should you fall seriously ill or become injured and unable to work.

This insurance is not intended as a form of income- this is why it’s paid in a lump sum and not monthly or in instalments. However, the money can be used in any way you see fit, such as investing to provide a monthly income.

Read more here

How does critical illness insurance work?

You’ll need to figure out how much cover you’ll need and how long you want the policy term to last. So, you could decide to cover the cost of paying off your mortgage and a year or more of your salary while you recover or find alternate income. If you fall critically ill, injured or get diagnosed with a condition listed in your policy, you’ll get a one-time, tax-free lump sum of cash and then your policy will end.

Critical illness insurance is often sold alongside life insurance and they work in a similar way. See life insurance.

What illnesses are covered?

Different insurance providers have different policies that include or exclude certain medical conditions. Generally, most critical illness policy covers:

  • Some cancers
  • Heart attack
  • Stroke
  • Some organ failure
  • Multiple sclerosis
  • Major transplant surgery
  • Alzheimer’s
  • Parkinsons

You’ll do assessments to make sure your policy covers the illnesses or medical conditions you may be concerned about.

What isn’t covered?

Critical illness insurance doesn’t cover minor illness, injury, accidents or death. These scenarios are covered by income protection and life insurance.

There are also often exclusions to policy, which you’ll need to check before you take out your insurance. Sometimes you can add cover for certain medical conditions, sometimes they’ll be specifically excluded- it entirely depends on the insurance the provider offers.

It’s also worth noting most critical illness insurance only allows you to make a claim once your illness or medical condition reaches a certain point of disability or inability to work. There may also be a short processing period so it’s important to get in touch with your insurer as soon as you receive a diagnosis.

How much cover?

The amount of cover you might want will depend on what you want to cover should you fall critically ill. You should consider things like:

  • Paying off mortgage
  • Rent while arranging new income
  • Home improvements or adaptations, depending on how your needs may change
  • Paying household bills while arranging new income
  • Paying off debt
  • Covering medical bills or equipment

The cost of your insurance will vary with different providers, but insurers often look at:

  • Lump sum you wish to receive should you claim on your critical illness insurance
  • Term of insurance
  • Age
  • Personal medical history
  • Family medical history
  • Type of work
  • Whether you’re a smoker

This information helps the insurer decide how much your monthly premium should be.

Who might want it?

It’s a personal decision whether to take out critical illness insurance, many people don’t like to think they’d fall ill or become disabled, but if you have financial commitments that working enables you to meet, it’s important to consider what protection you have in place should you lose the ability to earn that income.

Unemployment benefits vary, but they rarely match a working salary. If you’re in a couple, and one of you is over 25, you’d be entitled to £498.89 for you both per month. A single person over 25 would be entitled to £317.82 per month according to the current universal credit figures. (https://www.gov.uk/universal-credit/what-youll-get)

Of course, these figures increase if you’re off work and claiming due to illness- but you have a waiting period with assessments, and you’re not guaranteed a higher rate of benefit. If you fall ill and have mortgage payments, a new need for medical equipment and home adjustments a lump-sum of cash could help tide you over until new arrangements can be made.

Life Insurance

What is life insurance?

Life insurance is a type of protection insurance that provides a lump-sum of cash to your family or loved ones in the event of your death. It can provide a peace of mind knowing your loved ones will be provided for, can help pay for funeral costs or could go towards pay off your mortgage. Whatever the use, it’s there to cover the ones you leave behind should you pass.

Read more here

Types of life insurance

There are several different types of life insurance, covering different periods of time and situations.

Term assurance
With term life insurance, you have life insurance for a set period. This means your insurance will only pay out in the event of your death during the term of your policy. If you out-live the term of your policy, you won’t receive any money or the return of your premium. This could be useful if you’ve got a set term on a mortgage, for example, and wanted to make sure it could still be paid off by your family in the event of your death.

There are three main types of term assurance insurance;

Level term: pays out a lump sum if you pass away within the term of your policy. The amount of money you insured for stays level- the same- throughout the term of your insurance. Even with a repayment (decreasing mortgage) often people take fixed lump sum of cover to build up a ‘surplus’ in cover.

Decreasing term: the lump sum paid in the event of your death decreases over time, this type of policy is often intended for debt that decreased over time- such as a repayment mortgage.

Increasing term: this type of term assurance means the amount of money you’re insured for increases over time, often to match inflation, so your beneficiaries can get the maximum payment possible within your policy should you pass away.

Family income benefit policy
Family income benefit works differently, this type of life insurance is essentially a replacement income for your family over a set period. So, if you took out family income benefit policy, with a pay-out of £3000 per month on a valid claim, with a term of 40 years and you passed away 20 years into your term, your family would receive a monthly payment of £3000 for 20 years (£720,000).

This policy is usually intended for families, if the primary earner takes out family income benefit policy and passes away within the term, it means the family can live as usual until another income is arranged or the term of the policy ends. If you pass away after the term of your policy ends, your family won’t receive any payment.

Whole of life policy
This type of life insurance means that your beneficiaries get a lump sum payment in the event of your death, regardless of when that might be. Unlike term assurance or family income benefit policy, whole of life insurance doesn’t have a set period that it covers, you’re covered for your whole life until you die, your insurance providers pay your beneficiaries the lump sum agreed and the policy ends.

How does life insurance work?

Similar to critical illness cover, you work out how much you would like to leave to your beneficiaries, decide the term of your policy and what type of life insurance would suit your situation best, and

take out a life insurance policy which you pay monthly premiums for. In the event of your death, your policy would pay out the agreed amount to your chosen recipients.

Life insurance if often sold alongside critical illness insurance. See critical illness insurance.

What does life insurance cover?

Life insurance protects your family financially after you pass away. It’s intended to provide financial security to your loved ones when they can’t depend on your income or salary anymore.

How much cover?

The amount of cover you might want will depend on what you want to leave your beneficiaries, it also depends on the period you want to be covered. You might want to consider thing such as:

  • Paying off mortgage
  • Replacing your salary for a period of years
  • Leaving a cash gift to loved ones
  • Covering your funeral costs

Deciding what you want to protect could give you an idea of what insurance you might want, whether you want term assurance to cover your salary for your family in the event of your death before retirement, or whether you might want to leave a legacy to your family regardless of when you pass – figuring out what you want from your policy can help you find the right cover. If you’re struggling, you can always speak to one of our expert advisors to find out more.

The cost of your insurance will vary with different providers, but insurers often look at:

  • Lump sum you wish to leave
  • Term of insurance, if applicable
  • Term type- level, decreasing, increasing
  • Age
  • Personal medical history
  • Family medical history
  • Type of work
  • Whether you’re a smoker
  • Some policy requires you to disclose whether you take part in risky sport, if so, you might be charged more

This information helps the insurer decide how much your monthly premium should be. It’s also worth considering having your life insurance written in trust, if you have specific beneficiaries you wish to name. All life insurance policy can be written in trust, this lets you name your trustees and can offer protection from inheritance tax your life insurance pay-out wouldn’t be considered part of your estate.

Who might want life insurance?

If you have family, or dependants that rely on your income it’s worth considering protection insurance. You might also want to leave their loved ones a gift, help pay for funeral costs or make sure your family is financially secure in the event of your death.