Wouldn’t it be great to have access to a product that could protect you and your family financially should you fall ill and become unable to work? Such a product already exists but is surprisingly undervalued by consumers. Income protection insurance often comes up against negative sentiment, many consumers share certain perceptions about the product. It’s time to address these perceptions, challenge the top income protection myths and find out if there is any truth in them, or whether these perceptions are in fact misconceptions!
1. If you have sick pay through work, you don’t need income protection
If you know with certainty that you would receive enough sick pay from your employer to live on indefinitely, it’s certainly true that you wouldn’t need income protection. This, however, is rarely a reality!
Many of us have some sick pay through our employers, but have you ever checked exactly how much you’re entitled to, and for how long? It’s true that everyone is entitled to Statutory Sick Pay, providing £92 per week for up to 28 weeks, but do you receive anything in addition to this? If you do, this might only be for a few months and typically employee sickness is treated on a discretionary basis, so it’s not certain exactly what financial support you would receive if you became unable to work due to illness or accident.
We never plan to be ill, and we don’t know for how long we will be unable to work , so what if you were ill beyond your company sick pay period? Or even the 28 week Statutory Sick Pay period? How would you continue to cover your outgoings? And even then, could you survive on only £92 per week in the worse case scenario?
If you’re unable to answer any of these questions, you may need income protection. Sick pay is just one consideration though, we’ve written a useful article to help you work out if you need income protection, looking at everything from your savings to government benefits. Take a read here - Income Protection - do you really need It?
2. If you have critical illness insurance, you don’t need income protection
Critical illness insurance is a product which pays out a lump sum amount of money should you fall ill with a defined illness. This lump sum can be used as you wish, and could be used to replace your regular income if your illness means that you can't work. There are scenarios where an illness could receive the same financial support from both a critical illness policy and an income protection policy, in which case having just the one type of policy would suffice.
There are however a number of differences between the two products, which mean that income protection can go that little bit further in offering a financial helping hand should illness strike:
Lump sum vs. regular income
Critical illness insurance pays a one-off lump sum, when it’s gone it’s gone! Income protection insurance pays a regular income while you’re ill and unable to work, either until you make a recovery or your policy ends. As appealing as a large sum of money is, income protection can offer the long-term financial protection that critical illness may not be able to.
One-off vs. continuous protection
Once a critical illness policy has fully paid out, the policy comes to an end. It may even prove difficult to take out another policy after you’ve claimed. Income protection insurance however offers continuous protection, you can claim multiple times, even for the same illness.
Defined illness vs. any illness/accident
Critical illness policies typically cover around 50 conditions which they will pay out on. This means that unless you develop one of these conditions, you won’t be able to claim. Income protection on the other hand covers the inability to work, regardless of what illness or accident has caused that inability. According to the Office for National Statistics, musculoskeletal problems, such as back pain, were among the top causes of sickness absence from work, with mental health issues, such as stress, not far behind. Why is this important? Well it’s highly unlikely that critical illness cover would pay out for a back problem or stress, where income protection insurance may do.
3. Income protection will never pay out
This is definitely false! In fact, income protection is more likely than both life insurance and critical illness insurance to pay out. The reason for this is that it’s easier to claim on income protection than on the other products. You just have to be unable to work, rather than dying or developing a specified illness.
For example, according to LV’s Risk Reality Calculator, a 40 year old female has only a 3% chance of death before age 65, however she faces almost a 40% chance of falling ill and being unable to work for more than 2 months. In this scenario, her income protection policy is potentially over 10 times more likely to pay out than her life insurance policy.
4. Income protection is very expensive
Perceived cost puts many consumers off taking out income protection policies. But is income protection insurance as expensive as everyone thinks?
Let’s take that same 40 year old female, for £100,000 of life insurance to age 65, she would pay roughly £10 per month. For £100,000 of critical illness insurance to age 65, she would pay roughly £45 per month.
However for £1,500 of income protection insurance to age 65, she would pay only £43 per month.
Perhaps income protection cover is not as expensive as you first thought?
Of course there are factors that could increase the income protection premium, such as her occupation, we’ve assumed a low risk job in the above example. The higher risk the job the more expensive the income protection premium will be.
You can compare the income protection premiums charged by different insurance companies by using this helpful income protection quote calculator.
5. If you have a health problem or are self-employed you can’t take out income protection
When you apply for an income protection policy there are typically two types of underwriting that take place. Underwriting is the process where the insurance company assesses your risk and therefore is able to calculate the correct premium to charge you for your insurance. The higher risk you are, the greater your chances of claiming and the more expensive your monthly premium will be.
Medical underwriting involves questions about your health and allows the insurer to assess how healthy you are and your chances of illness. If you’ve had a health problem in the past the insurer may either increase your premium to reflect your increased risk, exclude any claims related to that previous health condition, or they may not offer you cover if they feel that your risk of a claim is too great.
Financial underwriting involves questions around your financial situation, allowing the insurer to correctly calculate the level of benefit you will receive if you claim. The financial evidence you need to provide will differ depending on your employment status. For example, if you’re employed you may be asked to provide a number of recent payslips. If you’re self-employed you may be asked for several years’ worth of self-assessments and accounts.
It’s worth bearing in mind though that not all insurers treat past medical conditions the same, and likewise, may not all ask for the same financial information. So being self-employed, or having a health condition, doesn’t necessarily mean you can’t take out income protection insurance, it’s just a case of finding the best insurer for you.
There are lots of different income protection products available and various things to consider when choosing the right policy. We would therefore highly recommend that you speak to an independent insurance adviser who will be able to assess your needs and recommend the best income protection product for you.