Income Protection Insurance

Income protection can be a confusing term as it is used by many companies to describe very different types of insurance policy. The main type of income protection insurance is also called permanent health insurance. It provides cover to replace your income in the event of a long term period of ill health.

The policy will pay its benefit indefinitely until you either return to work, cancel the policy or at the end of its specified term. One important aspect of permanent health insurance is that the insurer cannot cancel the policy simply because you have claimed several times, and the benefit is paid tax free in most circumstances on a personal policy.

The policy will be priced based on a range of different factors including the type of employment undertaken, whether you are smoker or not, the age the plan will terminate and the percentage of your annual income which you are looking to insure as well as various other factors.

It is a very different type of cover to accident sickness and unemployment insurance which provides short term cover of up to 2 years and which includes cover against redundancy. Some life insurance policies may include an option for income protection insurance cover and this may sometimes be a more cost effective method of combining cover if you require life insurance as well.

Income Protection - typical cover options

Income protection is normally only arranged on a sole applicant basis unless attached as an additional option to a joint life insurance policy. However many of the options available on the policy will be similar to a life insurance policy.

These include;

  • Term or end date
  • Renewable option as opposed to definite term
  • Guaranteed or reviewable premiums (most cover will be arranged on a guaranteed basis)
  • Indexation option to increase cover based on a percentage over time or against inflation measures

Other options which are not common to life insurance include;

  • Deferment period - This is the length of time from the onset of illness or morbidity before a claim can be made
  • Dual deferment period - This allows cover to be applied in two stages for example with a lower level whilst you will receive sick pay from your employer.
  • Limited payment period plans - It may be possible to arrange cover that will only pay out for a shorter term for example 5 Years

A key factor in the selection of an income protection insurance policy should be the definition of disability that is applied on the cover. If the cover is given on a suited occupation basis then in the event that you were able to perform a role similar in standing to your current employment then the plan may not pay out. An example may be a salesperson who is left unable to drive but who could perform a similar role on site with a different employer and without the need to drive.

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