Income protection

Income protection insurance is a policy designed to pay out a monthly amount if you are temporarily signed off work due to ill health, an injury or an accident. These plans are an excellent way of maintaining cash flow in the event of a temporary loss of earnings. This allows you to maintain your monthly commitments without making significant changes to your lifestyle.

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Income protection policies are specifically designed to offer long-term protection and continue to pay out until you return to work or the policy ends. The plan runs for a predetermined amount of time, similarly to life insurance. This will be either for a specific time frame or until you reach a certain age. The monthly benefit is chosen by the policy holder, which is limited to a percentage of earnings.

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What is Income Protection insurance?

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Income protection insurance, which may also be called permanent health insurance or IP insurance, pays out a monthly sum if you are unable to work through ill health, an injury or an accident.

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You will begin your monthly payments to the insurance provider as soon as you take out the policy. If you were to claim on your policy, the monthly payments will not begin until a deferred period has passed. This is the amount of time during which the policy holder must be off work with illness or injury. The longer the deferred period, the cheaper the insurance will be. It can be anything between four weeks and two years.

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The maximum cover available is usually between 50% and 65% of your pay before tax. This limit is a total for all the income protection policies you may have, so be careful not to over-insure yourself.

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Typically, the monthly payments last until you are able to return to work, retire or pass away – whichever comes first. However, some cheaper policies may only pay out for a certain period of time. Some others may only pay out until you return to any kind of work, as opposed to the full-time position you held before your illness or accident.

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If you’ve arranged your income protection policy through your employer, the payout is taxable as if it were salary. However, if you have arranged it yourself, the payments are tax-free.

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Why do I need Income Protection insurance?

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If you’re unable to work due to illness, you may be entitled to state benefits, but these are modest. That means you may struggle to meet financial commitments. If you are employed but are temporarily unable to work, your employer may have its own sick pay scheme, but even the most generous of these may mean a drop in income. If you’re self-employed and fall ill, there will be no help and you will have to rely on your savings.

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Income protection insurance can help to compensate for any shortfalls in your income, allowing you to keep up with financial commitments and maintain your current lifestyle. The most important commitments, such as mortgage or rent payments, energy bills and the food shop will all continue regardless of whether you can work or not. An income protection policy can provide peace of mind as well as a vital back up if something were to happen to you.

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• Mortgages or rental costs

• Bills or regular payments

• Credit card debts

• Other care costs

• Not relying on savings