Income protection: What does it cover?

The current coronavirus pandemic has had a global impact on the economy. With numerous businesses forced to close down or change operations, affecting employment across the UK, it highlights the importance of planning for the unexpected.

At these uncertain times you may be looking at what your existing policies cover or whether you have adequate protection in place should your income stop due to an accident or illness.

Income protection is designed to provide an income if you’re unable to work for an extended period of time.

It covers illnesses that leave you unable to work and would pay out a regular income under these circumstances until you return to work, retire or the policy term ends. It is important to check the policy terms and conditions for the illnesses that are covered and any exclusions that may apply. The amount paid out will typically be a percentage of your regular income, such as 60%. Crucially, you can claim as many times as you need to during the term of your policy.

However, most policies include a deferment period before it starts paying out. The longer your waiting period, the lower the monthly premiums will be. Deferment periods usually vary from one to twelve months. This allows you to choose a policy that suits the sick pay your employer offers and other sources of income you may be able to fall back on.

Despite the benefits of income protection, millions of Brits don’t have any sort of policy in place. Just 17% of employees in the UK say income protection is something they would have. In fact, Brits are twice as likely to insure their pets than themselves.

Understanding what your policy covers during the pandemic

Amid the coronavirus outbreak, there have been numerous questions asked by concerned policyholders about when their insurance would pay out. You may have questions about your own policy and where it can provide a safety net in these circumstances.

Will income protection pay out if I get coronavirus? If you’re too ill to work due to having coronavirus, your policy is likely to cover you if you provide a sickness note from a doctor. However, the vast majority of people affected by the virus recover within a couple of weeks or only experience minor symptoms. As a result, the deferment period would not be over by the time you’re able to return to work.

Would income protection cover self-isolation? This depends on your insurance policy. Some providers will cover you if you need to self-isolate based on medical advice, which would need to be evidenced. Again, the deferment period has an impact here.

Does income protection provide an income if my place of work has closed? Unfortunately, not. However, the government has introduced a raft of measures designed to provide an income to individuals if they’re no longer able to work due to a business closing down as a result of the pandemic. This includes a scheme that offers a grant of up to 80% of an employee’s wage for all employment costs, up to a cap of £2,500 per month.

It’s important to keep in mind that there will be variances between insurers and policies. If you’re unsure or have further questions, refer back to your policy documents or contact your provider.

In light of the pandemic, many insurers have chosen to withdraw products from the market or update terms to exclude coronavirus. So, if you’re considering taking out a new policy, it’s important to fully read what will be covered before taking it further.

What else should you do to improve financial resilience?

Income protection can provide you with security and confidence, but it’s not the only step you should be taking,

  • Understand your employer’s sick pay policy: Statutory Sick Pay (SSP) is just £94.25 per week, far below what is likely needed to cover even essential outgoings. However, many employers offer enhanced sick pay policies. Looking through your employee handbook or getting in touch with human resources can give you further information. Knowing what income you will have, and how long for, if you’re unable to work can provide peace of mind. It can also help you choose the right income protection policy for you, for example, informing what deferment period suits your circumstances.
  • Building an emergency fund: Setting money aside for a rainy day might not seem as exciting as investing to grow your wealth, but it’s still a crucial part of financial planning. If you don’t already have an emergency fund in place, today’s uncertainty should be the nudge needed to set one up. As a general rule, have three months of outgoings in an easily accessible account ‘just in case’.
  • Consider other financial protection products: Income protection is just one form of financial protection. Depending on your circumstances and priorities, you may also want to consider critical illness cover or life insurance. Critical illness cover pays out a lump sum on the diagnosis of a critical illness that is named without the policy. Among the most common critical illness claims are cancer, heart attack and stroke. In contrast, life insurance would pay out a lump sum on your death, providing loved ones with financial security.

These plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.

If you’d like to discuss income protection and how you can improve your financial resilience, please contact us. With your goals in mind, we’ll help you put appropriate policies and other measures in place to provide you with financial confidence.

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