Income Protection is different from Redundancy cover, as it covers you against an accident or ill health, rather than against losing your job and distinct from Critical Illness as it pays you an income rather than a lump sum.
The amount of benefit that is paid out from an income protection plan is set when the policy is taken out. Benefit can also be called cover or sum assured. There is a maximum benefit which will vary from one insurer to another but is normally around 75% of gross income. The benefit is normally paid monthly to the policyholder after a set deferment period and is not taxable. This type of policy is pure protection insurance so there is no cash in value at any time.
Policies provided by most insurers will have an indexation option that allows for the benefit (and premiums) to increase each year. This increase can be a fixed percentage or linked to an inflation index. Including the indexation option allows the benefit to remain the same in real terms, although it can make the initial premium slightly higher.
The deferment period is the waiting time between the start of inability to work and commencement of payment of the benefit. It will normally be 8, 13, 26 or 52 weeks and most people will match this to how long they are paid by their employer in the event of incapacity. Self-employed individuals will normally opt for a short deferment period as income quite often stops immediately. The longer the deferment period the lower the monthly or annual premium will be.
The benefit will normally be paid out until the sooner of return to work, death or reaching an age specified at outset. Normally people will choose a policy term that runs until their chosen retirement age, although insuring until an earlier age will reduce the monthly or annual premium paid.
Other factors that will affect the monthly premium are age, sex, smoking status, occupation and health. Premiums will be paid monthly or annually throughout the term of the policy. Policies are offered on an individual (single) life basis, not on a joint basis.
The guaranteed premium option will ensure that your premium will not change during the term of the plan if your chosen benefits remain the same. This allows you to know in advance how much your premiums will be over the term of the plan. There will be no change to this even if you make a claim.
The reviewable premium option will guarantee your premiums stay constant for the first 5 years of the plan. We will review the premium every 5 years thereafter. In the review we will take into account claims experience over the preceding years and changes in economic conditions. We will also take into account any medical breakthroughs and the discovery of any new diseases. If it is necessary to change the premium, we will offer you the choice of a change in either premium or benefits.
Insurers will categorise each occupation into an occupation class of 1 to 4 dependent on the risks involved. Class one would normally include the least risky occupations such as office workers, whereas class four would normally include more risky occupations. Cover that is arranged on an ‘own occupation’ basis will pay out in the event that incapacity prevents the policyholder from carrying out their normal occupation. A policy set up on an ‘any occupation’ basis will pay out if incapacity prevents the policyholder from carrying out any occupation which would be considered reasonable given their education and training.
In the event of a claim it will be necessary to provide proof of incapacity as well as evidence of employed or self employed earnings prior to incapacity.