What is a deferred period on an income protection policy?
The deferred period on an income protection insurance policy is the waiting period for income protection between the first day that you are unable to work due to illness or injury and when your policy benefits will start being paid to you. As an example, an income protection insurance policy with a 4-week deferred period will begin paying benefits once the policyholder has been off work for a period of 4 weeks.
How long is the deferred period?
The length of the deferred period is selected when you commence an income protection policy and this would typically be between 4 weeks and 12 months, although it can be shorter. The longer the chosen deferred period the lower the monthly premiums will be on an income protection policy.
What are the deferred period options for income protection insurance?
The income protection insurance policy will start paying a benefit after the deferred period and you can usually choose between the following periods:
- 1 day
- 1 week
- 4 weeks
- 13 weeks
- 26 weeks
- 52 weeks
- 104 weeks
Once you have been unable to work for the duration specified with your insurance, you will begin to receive an income replacement equal to the level of cover you chose. You will usually require a medical fit note or medical evidence from a doctor to support your incapacity to work so it is helpful to arrange this from the outset.
How do I choose the best deferred period for an income protection policy?
The best choice of income protection deferred period will depend on your personal circumstances and you need to take into account the following two factors:
- Sick pay from your employer - the amount and for how long
- Savings and other income sources you can rely on
How much sick pay do you receive from your employer?
If your employer pays you full sick pay for a period of time then it makes sense to set your deferred period to support you from the date the sick pay ceases. There is no point in setting your deferred period for less than your full company sick pay period as the insurance company will not pay out until you stop to receive sick pay from your employer.
What savings or other sources of income do you have?
You may have savings or other sources of income that you are happy to rely on in the event that you become unable to work. However, most people buy income protection insurance so that they can avoid depleting their savings in such an event so do bear this in mind. It could be more relevant to work out whether a partner's income or any unearned income could reduce your need for the income protection benefit too soon. A long-term illness is likely to be more detrimental to your finances and this is where the income protection insurance supports people who would otherwise find that they have run out of savings. Be realistic with how much of your savings you are willing to dip into if you stop earning during a period of illness and choose your deferred period accordingly.
What deferred period should I choose for redundancy insurance?
If you have redundancy insurance, otherwise known as unemployment insurance tied to your income protection or accident and sickness cover, the deferred period will be separate. Usually redundancy insurance comes with a standard deferred period of 4 weeks but you can sometimes choose a longer deferred period between 8, 13 and 26 weeks. In choosing the deferred period for your redundancy insurance you should consider what amount of redundancy payment you would receive from your employer and how long this may last if you were to use it to cover your outgoings while you seek other employment.
It is worth remembering that if your deferred period is short and provides you with money before you need it, you could put this aside until you do. The reverse may not be as flexible and accommodating.
Choosing the right income protection insurance and deferred period for your needs
I would always recommend that you speak to a professional adviser that specialises in income protection and life insurance. If you don't already know one, most people don't, then I have personally vetted the service provided by one income protection specialist*. They will be able to steer you in the direction of the right level of cover and search the whole market of life insurance companies for the best terms of cover including price based on your particular circumstances and budget.
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Available personal savings
If you have access to personal savings then it would make sense to factor this money when selecting a deferred period as it will save you money on your monthly premiums. If, for example, you have enough savings to replace your income for three months in the event of sickness, accident or redundancy and your employer would pay you full pay for three months, then you should set a deferred period of six months. It can be tempting to choose a shorter deferred period than what you need as this may seem like better value but if you never claim on the policy, you will have paid more than you needed to as shorter deferred periods cost more.
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