How it Works

Describing Income Payment Protection in More Detail

Benefit

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 two thirds 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.

Deferment Period

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 4, 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.

Term

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.

Cost

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.

Occupation Class

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.

Claims

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.

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