What to look for if you’re buying an income protection policy to pay out if you’re too ill to work

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Income protection insurance is designed to pay out if you can’t work due to illness, but not all policies are the same. So what should you look for if you’re buying an income protection policy?

Income protection – how it works

Income protection is designed to pay part of your salary if you can’t work because you’re ill. Many people worry about not being able to work because they’ve been made redundant, but every year thousands of people are signed off work for weeks, or even months, because they fall ill. Typically you might insure 50-60% of your wage before tax if you were buying an income protection policy privately and up to 75% if you took an income protection policy out through your employer.

SAVVY TIP: Payments are tax-free if you buy the policy privately, but taxed if paid through your employer, which is why the limits are different.

Income protection – what to look for

There are several things that it’s worth looking out for, if you want to buy an income protection policy. If you go to a good independent adviser or broker who specialises in this area, they’ll be able to point them out to you. Otherwise, it’s a question of scouring the information you’re given upfront on a company’s website or on a price comparison site, and asking questions.

SAVVY TIP: You normally have 30 days to cancel an income protection policy after you’ve taken it out and get your money back. That means you can change your mind if you discover something you’re not happy with after you’ve signed.

When an income protection policy may pay out

You might think that if you were ill and couldn’t work, that your income protection policy would pay out. Well, it might not. Only certain policies will pay out if you’re too ill to do your own job. Some will only pay out if you’re too ill to do some basic tasks, such as walking, writing down a message with a pen and so on.

The three types of income protection policy are:

1. Those that pay out if you can’t do your own job: These are called ‘own occupation’ policies

2. Those that pay out if you can’t do your job or a similar one: These are called ‘suited to occupation’ policies

SAVVY TIP: Buying a policy that’s been set up on an ‘own occupation’ or ‘suited to occupation’ basis is by far the best option.

3. Those that pay out if you can’t carry out a list of tasks. Typically there might be six tasks you’re tested on and you’d have to be unable to do three of them for your claim to succeed.

SAVVY TIP: You’d have to be pretty ill or incapacitated to not be able to complete the tasks you’re assessed on. They include things like being able to use a pen, pencil or keyboard with either hand; the ability to lift a 1kg weight and carry it for five metres and the ability to answer a telephone and relay a message.

Income protection policies with guaranteed premiums

When you take out an income protection policy, the premiums may be very affordable. However,if you don’t opt for something called ‘guaranteed premiums’; you could find the policy becomes unaffordable just at the moment when you need it most. That’s because the insurer can increase the premiums if you buy an income protection policy without something called ‘guaranteed premiums’. Tom Drewberry of Drewberry Insurance says that, in some cases, the premiums can rise sharply. “It’s not uncommon for premiums to rise fivefold if you keep the policy going until retirement.”

4. Premiums that aren’t guaranteed can be revised by the insurance company at any time. And they’re very rarely revised downwards. What’s far more likely is that they are increased – sometimes quite significantly – every few years. Guaranteed premiums do what they say on the tin. It means that the premiums are guaranteed to rise by inflation or

SAVVY TIP: Guaranteed premiums are more expensive initially but they can work out cheaper in the end.

Tips for buying an income protection policy

Here are five tips on buying an income protection policy.

1. Check whether you can buy an income protection policy through your work. If so, it will normally be cheaper and you should get better cover.

2. Work out how long you want the ‘deferred period’ to be. This is the time before any payments kick in. It can be anything between 30 days and two years. Income protection policies will generally be a lot cheaper if you choose a six month waiting period, rather than 30 days. However, brokers tell me there’s far less difference in price if you choose a two year waiting period rather than six months.

3. Don’t shop on price as the cheapest policy may not have the cover you need.

SAVVY TIP: Most people take out income protection policies as a long term commitment. It’s not the type of policy that you can shop around for every few years. If you’ve been ill in the meantime, for example, you would find it harder or more expensive to get income protection. There are some excellent brokers around who specialise in this area. Lifesearch are brokers who know this area well and I’ve dealt with them as a journalist for a number of years.

4. The best cover is one that will pay out if you can’t do your own job. Some policies will only trigger a payout if you’re unable to do any job at all.

5. Make sure you’re completely honest when you fill in the application form. Don’t miss out any illnesses when you’re asked for your medical history. It may seem like a faff to have to put so much detail in the application form, but if you miss out something important, it could mean your claim is rejected.

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