If an illness or injury meant you were unable to work and couldn’t pay the bills, what would you do? It can be a stressful time for anyone who unexpectedly falls ill or gets injured and has to take time off work, especially if they don’t have any source of income or savings to fall back on.
That’s when you would be thankful for having bought income protection.
An income protection plan is a type of insurance policy that every working UK adult should consider buying. Income protection provides you with a regular income if you are unable to work due to an illness or injury. It usually pays out until you are ready to go back to work or retire, and you can claim as many times as you need to, depending on the type of plan you buy.
Read on to find out more about income protection planning and the benefits of having a plan in place.
Although you might get statutory sick pay (£94.25 per week) from your employer, it might not be enough to cover you for the length of time you are going to be off sick. With an income protection plan, you’ll receive a significant proportion of your monthly income for each month you are off work. These are paid to you monthly, tax-free, and will cover your household bills and lifestyle expenses until you can return to work or retire.
Income protection and payment protection insurance (PPI) are two different insurance policies.
Where PPI covers any debt repayments, such as loans and credit cards you’re unable to make, income protection makes sure you can pay for other household bills, including food, utilities, fuel, and clothing, until you are ready to go back to work or retire.
An income protection plan pays out if you can’t work due to an illness or injury. This could be a critical injury or illness, or stress, depression, or back pain. The amount of cover you get from an income protection plan will depend on how much cover you choose. A basic income protection plan will provide a regular income until you are well enough to return to work, or until the end of the policy term. The plan is usually enough to cover your mortgage/rent payments, household bills; food, fuel, and clothing, and any other lifestyle expenses, while you are off sick.
The income you get from an income protection plan is generally a tax-free proportion of your income (although it depends on who pays the premium – it will be taxed if the plan is set up by your employer). They’re usually made free of income tax.
The amount an income protection plan costs depends on how much you want to be paid if you’re unable to work and what type of policy you take out. Factors, such as age, health, job, smoker status, debts and number of dependants, will all contribute to how much your income protection plan costs.
Some income protection policies affect your State benefits. However, any employment-related State benefits, such as contributory Employment and Support Allowance (ESA) won’t be affected.
Income protection usually stops paying out after you have retired or returned to work. It also pays out if someone in your family, who had an income protection plan, has passed away.
Income protection isn’t paid out if you’re made redundant. However, some insurance policies do provide ‘back to work’ help if you are off work due to an illness.
The level of cover you’ll need will be based on how much you’ll need to pay for your outgoings while you are off sick. To work out the level of cover you need, look at how much you take home from your annual salary. Calculate your basic monthly outgoings, such as any direct debits, standing orders, and debts you have, as well as how much you need for utilities, food, fuel, and clothing. Then take away anything you get from State benefits, including any expenses you get from work. This is how much you’ll need your policy to pay out when you’ve stopped working.
If you’re self-employed, you won’t qualify for statutory sick pay or redundancy pay, which is why it’s even more important to consider taking out an income protection plan. An income protection plan for self-employed workers means you’ll receive a payout and your outgoings will be covered if you fall ill or injured.
For any help on income protection planning, get in touch. We’re here to offer financial planning advice when you need it.