How financially resilient are you?
You insure your car, home and maybe even your pets, but what about insuring what pays for everything – your income?
Arguably the most important of insurances, income protection (or Permanent Health Insurance [PHI] as it is sometimes know), pays out a regular tax free income should you be unable to work due to accident or sickness. It should not be confused with Private Medical Insurance (PMI) which is designed to cover the cost of private medical expenses.
Statutory Sick Pay for employees is £88.45 per week, subject to tax and national insurance and payable by employers for up to 28 weeks. After this period you may be able to apply for Employment and Support allowance (ESA), subject to a “work capability assessment”.
State support for mortgage interest meets the interest costs (not any capital repayments) on mortgages of up to £200,000. From April 2016 the “waiting period” for this has increased to 39 weeks from 13. From April 2018 the basis of this system will change from a government payment to a government loan. Consequently, it is of even greater importance for people to protect their home and family should they be unable to work due to accident or illness, and particularly for the self-employed where “financial resilience” could be weakest.
Unlike some other insurances it is not all about seeking out the plan with the lowest premiums – although some kind of protection is better than none!
Definitions of disability vary considerably. Does your income protection pay out on an “own occupation”, “any suited” or “any” occupation basis? The definition of disability affects the premiums payable, with “own occupation” offering the best protection.
Most policies linked to mortgages have a “limited benefit period”, with many limited to just two years. “Permanent” income protection pays out until death, retirement or a return to work. Many pay out a partial payment if you return to work on a lower rate of pay or on a part time basis. Income protection can also offer an increasing benefit to offset the effects of inflation.
A “guaranteed” premium can be obtained which means the premium cannot increase in the future and premiums increases for escalating benefit levels are payable at the same rate as at outset, no matter what happens e.g. your health deteriorates or you made a claim.
What sets PHI apart from other insurances is that it cannot be withdrawn, or the policy conditions changed, if a claim is made – multiple claims can be made. This makes it a particularly valuable form of protection.
This type of insurance is, generally, vastly undervalued and should be at the top of nearly everyone’s financial planning shopping list. And yes, before you ask, I have income protection myself – guaranteed premiums, with increasing and partial benefits on an “own” occupation basis. Do you?
Author: Paul Newton FPFS, CertPFS (DM & Securities), STEP Affiliate, CertPMI is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022. This article is for information purposes only and does not constitute financial advice which should be sought before any action taken.