Income Protection and Unemployment Cover
Income protection or permanent health insurance plans are designed to pay a monthly income to you if you are ever off work with an illness or injury.
What type of Income Protection Plans are there?
There are two main types of income protection plans. There are long term income protection plans such as permanent health insurance and there are short term plans such as ASU, (Accident, Sickness and Unemployment) and PPI (Payment Protection Insurance*) and MPPI (Mortgage Payment Protection).
*Payment Protection Insurance is optional. There are other providers of Payment Protection Insurance and other products designed to protect you against loss of income. For impartial information about insurance, please visit the website at www.moneymadeclear.org.uk
The short term insurance plans are normally taken out to cover a debt or mortgage and there are usually no medical questions required to be asked. The short term plan is open to almost anyone in employment and as there are usually no medical questions, the plans often just have full blanket exclusion on all pre-existing medical conditions no matter how long ago they were. The insurance plans normally have a restricted pay-out period of one or two years and have to be reviewed every year due to the fact the plan is a general insurance plan the terms and conditions are subject to change. If you are to claim on your plan in year one and have a two year policy, the insurance company may decide to exclude the condition you have suffered, going forward.
One of the key issues with the payment protection insurance scandal in recent years is that these plans were sold to everyone, irrespective of whether they required it or not. The plan has the same terms and conditions for everyone, however as everyone’s circumstances are different, the policies could not be right for everyone. This resulted in many claims that were put forward being turned down. We are proud to say at Proadvice we have never had a policy turned down for any income protection product or a complaint on the product being mis-sold. This is because we at Proadvice will take every care to ensure we only recommend a product that is completely suited to you.
The long term income protection plans are linked to your income. There is no need for a loan or mortgage (so an additional debt) to set the plan up unlike with the short term plans. The plans pay a percentage of your salary during a period of sickness and the plans normally run until you can go back to work or reach retirement.
Long term income protection plans are required to be medically and financially underwritten and are personal to the applicant. The plans are built around your job and medical history; it is not a one size fits all. If you have suffered from a bad back or stress in the past then you may find the insurance company choose to exclude the pre-existing condition from your plan. As the plan is designed to run to your retirement there is no need to review the plan yearly, however it is advised that you keep in contact with your Proadvice financial adviser and update them if there is a change in your job, salary or sick-pay as a change in circumstances could reduce your premium cost.
What Type of Income Protection do I Need?
Income protection cover is usually for 50% of your annual salary. You are not able to request from your insurance company for more income than you are entitled to and at the point of any claim if you cannot prove your income then the insurance company will only pay what they believe you are entitled to.
In addition to this, you will also need to be cautious that you do not under insure yourself. If you are off of work on long term sick then you will surprised how much you need to get by, even if you cut down on all luxuries so you will need to ensure you costs can be covered.
Normally the most common things that need to be covered are mortgage or rent payment. If you are ill you will still be required to keep up your repayments to keep a roof over your head. The bill payments will also need to be maintained, the last thing you will need is to be sitting in the dark or cold when you are attempting to recover from an illness. Food is also vital; many people forget to take this cost into consideration. To assist in your recovery, a healthy diet and having all the essentials would be a great start.
Who are the Best Income Protection Providers?
The most important thing about income protection is to ensure you are covered for Own Occupation. Own Occupation allows you to obtain the benefit if you are unable to carry out the majority of tasks you have been trained to do in their own occupation. In respect of income protection policies, there are three options available.
- Own Occupation - which pays out if you are unable to do your own job
- Suited Occupation - which pays out if you are unable to do a job of similar skills and experiences
- Work Tasks - which pays out if you cannot perform a certain number of activities from a specified list
Work tasks/activities of daily living: For example If you are a builder and you have your daily work tasks and broke your foot you would then be unable to work. However this does not mean you will get a pay-out from an income protection policy because you could still do several other jobs such as become an office worker. Even if you are signed off of work with your GP you may not get a pay-out. You would need to fail enough of the activities of daily living to be able to claim on the income protection plan. The tasks vary from company to company; typically these tasks are:
Suited Occupation, this plan will only pay out if you cannot continue in a job role which is your own or of similar skill, training or qualifications and experience.
For example if you are a Sales Manager but could not carry on with the job due to perhaps the stress of the job, the insurance company may not pay out as they believe you could apply for a less stressful position as long as the pay and skill level was the same.
Own Occupation, this is the best definition you can hope for. You need to make sure, where possible, that if you are taking out an income protection policy that this is what you have. Whatever your occupation may be, if you suffer from a medical condition or injury that prevents you from doing your own job then the plan will be paid out, irrespective of whether you can do another job. For example, if you are a surgeon who severs the tendons in their hand, you may be able to do several other jobs but as you cannot work as a surgeon the plan pays until you are able to go back to your job. Another example is a builder who has hurt his back. If he is signed off of work, he can claim on his income protection plan until he is able to return to his work.
What Class do I belong to in Income Protection?
- Class A1: Professional rate class such as an Accountant or Lawyer
- Class 1: Executive, managerial and clerical occupations such as a Computer Programmer, Administrator or Receptionist
- Class 2: Professional or managerial occupations such as a Dentist, Veterinarian or Telesales
- Class 3: Skilled occupations such as a Nurse, Plumber or Electrician
- Class 4: Skilled occupations involving a large degree of manual duties such as Agricultural Worker, Bricklayer or Carpenter
Which Income Protection companies have the best pay-out rates?
The top five income protection plans in order of claims statistics are detailed below;
2013 claims statistics direct from the insurers:
Exeter Family Friendly
What is interesting about the claims statistics is that the top three companies are all friendly societies, which means there are no shareholders and by having no shareholders, their focus is completely on their customers and ensuring their clients are happy, satisfied and more importantly insured and not just all about providing a profit for their shareholders.
How to save money on Income Protection?
There are a number of options when it comes to reducing your income protection:
One option could be change your plan from own occupation to suited or work related tasks however we would rarely recommend doing this in the first instance. Instead, we at Proadvice will normally recommend one of the following:
Change the Deferred Period
The period from making a claim to when the money arrives in your bank account is called the deferred period. The longer you are willing to wait on your deferred period the cheaper your plan will be. You may decide that your statutory sick pay of £87.55 per week is enough to cope on for 6 months so decide to set your income protection plan with a 6 month deferred period. If you have sick pay at work you may start your income protection cover deferred period after your sick pay finishes. For example, if you worked in the National Health Service as a Nurse, you may have 6 months full pay and 6 months half pay and therefore may arrange to have the pay-out after the 12 months. Savings, credit cards and overdrafts. Some people believe or decide that should the worst happen they may be able to survive for a few months on their savings, credit cards and overdrafts. If you do have funds to see you through initially then it may be worth working out how long you are able to get by for and set your deferred period to start after this period. This will also then reduce the cost of your income protection policy.
Change the Term of your Plan
Rather than covering yourself until your retirement, you may decide to save money by only covering yourself for a certain period of time. Other common reasons for deciding to opt for a shorter term plan may include;
1) Taking a plan to see you through to when your children plan to leave home or finish full time education
2) Taking a plan to see you through to the end of your mortgage
3) Taking a plan to see you through until you can retrain and go back to work in a different role
Many income protection providers have a budget plan. The idea behind a budget plan policy is to provide a long term sickness plan with a shorter pay-out period. The plans can still cover you until your retirement however will only receive a maximum of two years per claim.
Income Protection for Doctors
One of the benefits in joining the National Health Service is the sick pay they provide. To qualify for the sick pay benefit employees of the NHS are required tohave a minimum of five years in service. Many insurance companies offer a NHS Doctors Sick Pay Plan and this plan is designed to replace your income as soon as you are off of work due to illness and your sickpayhas finished, no matter how long you have been employed by the NHS. Even if you have only been in employment for a year youwill be entitled to a full pay-out from the insurer. These plans make the doctors income protection more affordable and accessible no matter what your length of service.
Do I Need an Income Protection Plan as I have Statutory Sick Pay with Work?
Statutory sick pay is currently set at £87.55 per week for a period of 6 months. If your bills, rent or mortgage, food and living costs are currently less then £87.55 a week then you may not need income protection. Unfortunately the majority of us probably could not survive financially on £87.55 per week and will require an income protection policy to help to keep a roof over your head and to pay for your essentials.
Do I need Income Protection as I have full Sick Pay with Work?
The question to ask yourself is, how long does your sick pay last?
If you are lucky you may be entitled to 3 months off of work as a Government employee or as an employee of the National Health Service, it may even be long as a year. At this moment in time, according to the government as many as 300,000 workers join the long term sick register in the UK every year. The average duration of long term sick leave is 7 years with 34% of people currently off of work for longer than 10 years. By having income protection you can cover these years after your sickness cover ends at work. The good news is that by having sick pay through your employer your premiums will be reduced.
How much will Income Protection Cost?
Income protection, more than any other insurance policy is completely tailored and built around you, your job and your medical history and like other insurance plans the younger you are the cheaper your plan will be. If you have two people, one aged 21 and the other aged 41 doing the same job, the younger person would pay less for their income protection insurance than the older person as the older worker is more likely to suffer with their health and well being and are more likely to become ill and claim on their policy.
In many cases it is your occupation that makes the biggest difference to your income protection premium cost, for example if you are a young taxi driver you might pay more for your income protection insurance than a middle aged office worker. This is due to the fact that the risks are greater driving around all day than sitting behind a desk in an office.
The best thing about an income protection policy is that the plan is yours and tailored for you. No one plan is the same. The more dangerous your job or if your job involves a lot of manual work the more the insurance policy will cost you than if you were for example, an administrator, this is because there are more things that can stop you from working. A broken hand would prevent a Carpenter from being able to do their job but it would not stop a Lawyer.
Your job title alone is not enough for the insurance company to be able to price your income protection plan. You may have two workers of the same age, within the same company, who have requested the same deferment period for the same salary both working as Account Managers, yet one of them travels around the country meeting clients face to face and the other is telephone based. The person on the road would certainly have a higher premium to pay and this is what makes income protection unique. The plan you decide to take out with your Proadvice financial adviser will be built around you and your job. There will be no need to worry that you are required to suffer the ‘right kind of heart attack’ or if something happens to you and you are unable to do your job so are off sick, your plan will pay out and support you throughout your illness.
Approximately 1,589 people are made redundant in the UK every day. It appears that the days of ‘jobs for life’ are well and truly gone (1). It could be a total surprise when you suddenly find yourself unemployed but sadly this is a lot more common in recent times than some people realise. An unemployment plan could be a real saviour if you are ever unfortunate enough to find yourself in the position of being made redundant.
Providing you have remained in continuous employment for more than 6 months, you are eligible to take out an unemployment plan. If you are a contract worker and have had at least one 12 month review and your contract extended, then you are also eligible to take out unemployment cover. The self-employed are entitled to unemployment cover however this can be more difficult to claim on and would require declaring the business as bankrupt, it cannot be used as a tool or to rely on for income when work is slow.
The insurers will also want to know if you are aware of any risk of being made redundant.
- Circumstances could include, but are not restricted to:
- Are you currently in a dispute or in the course of any disciplinary action with your employer?
- Are you aware of a loss of major contract or an internal restructure?
- Are you aware of any profits warning strategic reviews for part or all of the business?
- Is there a change of ownership pending or any cost cutting programmes?
On a successful claim the plan will pay out a monthly tax free benefit to you to cover your rent or mortgage and additional costs. Many insurance companies will insist on you having a mortgage to be able to have an unemployment cover plan, however as more people are renting in recent years, these restrictions have since been relaxed. The pay-out in relation to your unemployment cover is normally for 12 or 24 months and with many insurance companies once you have claimed on your plan it then results in your plan coming to an end.
Proadvice are able to recommend polices with particular insurers if required, that if after you claim on your unemployment cover you are then able to reinstate your plan after you starting work again and if necessary and you find yourself in the same position again you are then able to claim on the benefit again. If you find yourself in the unfortunate position of needing to make another claim, the claim would need to be after 6 months of starting at your new employment. The benefit will usually be restricted to a total of 36 months during the term of the plan and the unemployment policy will only pay out for 12 months per claim. There are some insurers that may be able to cover you for 24 months, rather than 12 months if required.
Many unemployment plans are classed as general insurance and are on a rolling contract. This means that the plans can be reviewed and renewed every twelve months by the insurance company and are therefore subject to change.
On the basis of the insurance companies reviewing policies, you could find that the terms and conditions on your unemployment plan change on a yearly basis or are even withdrawn completely after a year. There are some genuine protection plans for longer terms and these plans offer unemployment for a longer term and cannot be reviewed or renewed by the insurance company. This will give you peace of mind with your policy should a claim need to be made at any point in the future. By speaking to your Proadvice financial adviser they can point you in the right direction and find the plan that is most suited to you and your needs.
At this current time, unemployment cover plans are not available for Investment Bankers and if you are a Company Director you may also struggle to find an insurance provider that will cover you. Please do not hesitate to contact your Proadvice financial adviser to discuss your options.