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Income Protection Insurance
Income protection insurance is also referred to as permanent health insurance (PHI), Income Insurance and Income Replacement Cover. Income Protection differs from life insurance by paying out not on death but when the insured is unable to work due to illness, accident or disability. It provides a regular income to replace that which the insured may no longer be able to earn. As long as you keep paying the premiums the insurance company won’t cancel your policy or increase the premiums of the policy, no matter how many claims are made. Income Protection Insurance is classified as a long-term insurance contract, rather than a general insurance policy such as ASU which normally only pays for 12 months.
Do I need Income Protection Insurance?
The main use of Income Protection Assurance is to protect the insured against loss of earnings resulting from accident or sickness:
- It meets a major need of all earners to provide protection their earnings against disability since a total stop of earnings for any length of time will cause great hardship, including the possible loss of a mortgaged home.
- Income Protection should be high on the priority list of recommendations for anyone not covered by a group or company scheme, and who is in an eligible occupation.
Many such people will, of course, be self-employed and need the shortest possible deferment period. For employed persons, the income benefit should be planned to start when any sick pay from your employer ceases. When an employee's sick pay entitlement is a period of full pay followed by a period of half pay, it is possible for the Income Protection Insurance to provide benefits based initially on half pay and then subsequently on full pay however we recommend speaking to a financial advisor to make sure your policy is setup in this way, so you get the best deal possible and don't pay any more for your premium than you need to.
The amount of monthly income benefit insured should be related to the client's monthly earnings, bearing in mind the following:
- How much you can afford to pay.
- How much benefit is necessary and/or desirable.
- The fact that Income Protection Benefits are not subject to income tax or national insurance (unlike the earnings that they replace).
- How quickly earnings will cease for a self-employed person.
- How long an employer will keep paying an employee, and at what rate.
- What State benefits could be claimed.
- There would be no point in providing Income Protection if the state benefits would be adequate, although this is most unlikely to be the case.
- The insurance company is likely to restrict the maximum amount of benefit payable, usually subject to a maximum of 65% of income.
The term of the policy should normally be to the expected date of retirement as the object is to protect earnings during the insured's working life.
Income Protection Insurance is often mistaken for ASU (Accident, Sickness and Unemployment) Cover. Income Protection provides long term protection of income for illness or disability, whereas ASU provides short term cover for illness, disability and redundancy.
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