Income Protection

Formerly known as “Permanent Health Insurance” (PHI) or “Long-term Income Protection” (IP) is an insurance policy that pays out if you’re unable to work due to injury or illness.You may have seen the Paul Whitehouse-fronted Aviva advert, or Unum’s Back-up Plan adverts – both promoting income protection.

IP usually pays out until retirement, death or your return to work, although short-term IP policies are now available at a lower cost. IP doesn’t usually pay out if you’re made redundant, but will often provide ‘back to work’ help if you’re off sick.

Millions of us have policies like private medical insurance and payment protection insurance, sold to us over the years by salespeople who convinced us we needed protecting. However, whilst they were right about the protection, they were often wrong about the policies. The one protection policy every working adult in the UK should consider is the very one most of us don’t have – income protection.

How much does income protection pay out?

Income protection payouts are usually based on a percentage of your earnings: 50% to 70% is the norm. Payments are tax-free.IP policies only pay out once a pre-agreed period has passed, generally ranging from one to 12 months after you put in a claim. The longer the ‘deferral’ period you choose, the lower your premiums. The default deferral period tends to be 13 or 26 weeks.Most IP providers pay an impressive 90% or more of claims. Insurance giants Aviva and LV both paid out 91% in 2011, while British Friendly and PG Mutual each paid 98%.

Many providers, though, including Friends Life, Scottish Provident, Bright Grey and Zurich won’t reveal their payout rate. We think they should.

According to research by Unum and Personnel Today, just 12% of employers support their staff for more than a year if they’re off sick from work. Given the low level of state benefits available, everyone of working age should consider IP, but when we asked the public, just 9% said they have some form of IP, compared with 41% who have life insurance and 16% who have private medical insurance (PMI).

One industry survey showed less than a quarter of people deemed protecting their income to be essential, compared with 74% who said the same of needing access to broadband internet.

Let’s be clear – income protection isn’t the same as the widely mis-sold payment protection insurance (PPI). Where PPI covers a particular debt and any payouts go to your lender, income protection provides you with a tax-free percentage of your income if you’re unable to work due to illness or injury. How you spend the money is up to you.
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