What is it?
Income protection insurance, formerly known as permanent health insurance, is designed to help protect you, your family and your lifestyle in the event that you cannot work and cope financially due to an illness or accidental injury preventing you from working. Without a regular income, you may find that you would struggle financially even if you were ill for only a short period and could end up using your savings to pay the bills.
In you suffer from a serious illness, medical condition, or accident; you could also find that you are never able to return to work.
Few of us could cope financially if we were off work for more than 6 or 9 months. By law, your employer must pay most employees statutory sick pay for up to 28 weeks. This will almost certainly be a lot less than your full earnings. Few employers pay for longer periods. If you find yourself in a situation where you are unable to return to work, your employer could even stop paying you altogether and terminate your employment. After that, you would probably have to rely on state benefits. Some employers arrange group income protection insurance for their employees, which can pay out an income after the statutory sick period.
Who is it for?
This type of plan is designed for anyone who is working (employed or self employed).
Income protection insurance aims to put you back to the position you were in before you were unable to work. It pays a regular tax-free monthly income. It does not allow you to make a profit out of your misfortune. So the maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for state benefits you can claim. This is usually translated into a maximum of 50 per cent to 65 per cent of your before-tax earnings.
If you are self-employed, then no work is also likely to mean no income. However, depending on what you do, you may have income coming in from earlier work, even if you are ill for several months. The self-employed can take out individual policies rather than business ones, but you need to ensure on what basis the insurer will pay out. A typical basis for payment is your pre-tax share of the gross profit after deduction of trading expenses, in the 12 months immediately prior to the date of your incapacity. Some policies operate an average over the last 3 years as they understand that self-employed people often have a fluctuating income.