What is the difference between income protection and PPI?
A number of our readers have asked me what is the difference between income protection and PPI, so I have compared the two quite different policies to clarify the situation.
What is income protection insurance?
Income protection insurance is a protection product that is designed to replace a percentage of your income if you are unable to work because of illness or injury. The policy will pay out a monthly amount that can be used for any purpose but typically is used to cover mortgage payments and household bills. Income protection insurance can be either a short term or long term policy with premiums paid monthly.
When does income protection insurance pay out?
An income protection insurance will pay out an income directly to the policyholder after you have been off work for a period of time agreed at the commencement of the policy, this would typically be between 7 days and 12 months. The shorter the period the higher the premium paid. The policy application involves full medical underwriting meaning you'll be asked about your health and lifestyle, the advantage is that there are rarely medical problems that aren't covered under this type of insurance policy. Once the insurer has assessed your application, they could exclude a pre-existing medical condition that they feel may increase the likelihood of you being unable to work due to illness in the future. There is generally more peace of mind that if you were unable to work due to illness or an injury it would be covered with an income protection insurance policy.
What is income protection insurance used for?
Income protection insurance is designed to provide the policyholder with an income when off work due to accident or illness. This income would typically be around 70% of gross income and the level of cover should be enough to cover mortgage payments and basic bills.
How does income protection insurance work?
The policy application involves full medical underwriting meaning you'll be asked about your health and lifestyle, the advantage is that there are rarely medical problems that aren't covered under this type of insurance policy. Once the insurer has assessed your application, they could exclude a pre-existing medical condition that they feel may increase the likelihood of you being unable to work due to illness in the future. There is generally more peace of mind that if you were unable to work due to illness or an injury it would be covered with an income protection insurance policy.
The income would continue to be paid from an income protection insurance for as long as you were ill, until you were able to return to work if you chose a full income protection option. Budget income protection options that are sometimes called short term income protection can be set to pay you for 1, 2 or 5 years and this option costs less than a full income protection insurance which could potentially carry of paying an income until your chosen retirement age on the policy.
Budget income protection insurance policies shouldn't directly be compared with payment protection insurance because payment protection insurance is renewable insurance and does not provide the same security of budget income protection which is a permanent contract where the insurer couldn't suddenly decide to not renew your insurance because you because of your claims history.
What is PPI?
Payment protection insurance (PPI) will cover monthly payments on a loan or credit card if the policyholder is off work due to illness or accident or made involuntarily redundant and is typically taken out at the same time as a loan. This type of insurance may also be known as ASU (accident sickness and unemployment) or MPP (mortgage payment protection).
How does PPI work?
A PPI application process is far simpler than that for income protection insurance as you are rarely asked about your health history but the disadvantage of this is that there are usually standard exclusions within this type of policy - namely, those illnesses that have higher claims associated with them, such as back pain as well as other musculoskeletal conditions and mental health conditions. There may be other standard exclusions within a PPI contract too and you should check terms and conditions for what is and isn't covered. For example, the policy may include an occupation definition that means it will only pay out if you can't do 'any occupation', 'a suited occupation' or 'basic daily tasks'. You can read more in our article, 'Sick pay insurance: Occupation incapacity definitions explained'
When does PPI pay out?
PPI will typically payout 30 days after the policyholder stops working and will only pay for 12-24 months. Any payments made under a PPI are made directly to the loan company not to the policyholder. It is an annually renewable contract so there is a concern that if you made a claim, the insurance may become more expensive or unavailable to you at renewal which isn't the case with income protection insurance which used to be called permanent health insurance for this reason.
What is PPI used for?
PPI is used to cover a loan or credit card payment and therefore it is possible for an individual to have more than one policy to cover different loans. Any payments made will be a set period of time which is set at the outset of the policy.
Further reading: A guide to income protection insurance, Can I get income protection insurance if I am self-employed?