£769.19 - Average weekly household income
£554.20 - Average weekly household expenditure [1]
£92.50 - Statutory Sick Pay
Many people overestimate the generosity of their employer in the event that they may be unable work, and are not aware of the consequences of relying solely on State benefits. Only around 1 in 3 people in the UK have enough savings to cover 3 months’ expenditure [2].
One of the most applicable yet under-utilised forms of insurance, Income Protection pays the policyholder a guaranteed regular income if they are unable to work due to an illness or injury. The insurance will continue to pay out until you are well enough to return to work, no matter how long that may be.
There are a multitude of aspects about your life that affect your income protection requirements. Listed below are some of the fundamental factors that determine the cost of an Income Protection policy:
The level of income required
The length of deferred period selected
How much your livelihood would be affected if you suffered an illness or injury
The maximum income level that you can benefit from is dependent upon your earnings prior to making a claim, and will vary from one insurer to another. The benefits from an income protection policy are paid out tax-free, and most will pay out between 50% and 70% of your pre-injury salary (net profit if self-employed).
A higher level of income protection will result in a higher premium, but you can manage the cost of a policy by choosing how much of your income you would like to protect. Although some might prefer to protect the majority of their take-home pay, others may instead opt for enough protection to cover only essential expenditure: food, mortgage payments and utility bills for example.
The deferred period is the length of time for which you must be unable to work before your policy will start to pay you an income. A shorter deferred period equates to a higher premium, as there is a greater chance that the insurer will have to replace your income (you’re more likely to be off work for a couple of weeks than for a year or two).
Deferred periods can range from as long as 24 months, to as short as 24 hours. It’s vitally important that an employer’s sick pay arrangements are considered when calculating a deferred period, in order to avoid under-(or over)-insuring yourself.
A key determinant of the cost of an income protection policy is your occupation. If you have a back injury, you are more likely to be able to return to an office-based job, than to a more physical job like a gardener or personal trainer. Therefore, you are likely to pay a lower premium if you are at less risk of being unable to work.
Fortunately, there are a number of niche insurers that specialise in offering income protection to higher-risk workers. Their expertise in this area allows them to offer policies that are more affordable than those available from the mainstream insurance companies.
If you are able to return to work following an injury or illness, many providers will also pay you a proportionate benefit that can top-up your income if it is lower than it previously was. This could be if you return to the same job on a part-time basis, or even if you have to take up a lower-paid occupation because of your incapacity.
Income protection plays an important role in financial planning, and offers far reaching financial security. Not only does it replace your income, it allows you to continue contributing to your pension, continue making mortgage repayments, and continue paying the premiums on your other insurance policies!
[1] – Office of National Statistics, Average disposable income per household (non-retired), 2016/17
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/householddisposableincomeandinequality
[2] – LV= Research, 2015