Guest blog by Adriana Lokman, Managing Director and Independent Financial Advisor at Alfa Wealth.

When the unexpected strikes, our world can be turned upside down instantly. It’s never pleasant to contemplate misfortune, but what if a serious illness leaves you unable to work? How would you cope financially? 

While we all hope such circumstances never befall us, it’s crucial to recognise that no one is exempt from the possibility of illness or accidents. We can’t guarantee that we won’t fall victim to a sudden mishap or receive a life-changing diagnosis. In such situations, mortgage and rent payments and bills don’t stop, so choosing to forego income protection insurance could be risky. 

In this guide, we break down some important points to consider when it comes to income protection insurance, as well as listing the benefits this type of cover brings.  

Lifeline during challenging times 

Income protection insurance is a long-term safety net that offers monthly payments if illness or injury prevent you from working. This coverage typically continues until you can return to work, retire, pass away, or reach the end of the policy term – whichever comes first. To align with your unique financial needs, you can choose when payments begin, typically after sick pay ends or other insurance coverage ceases. Opting for a more extended waiting period can result in lower monthly premiums.  

Comprehensive coverage, for peace of mind 

This type of insurance covers a wide range of illnesses and disabilities, both short and long-term, ensuring you’re protected regardless of the nature of your incapacity. As long as your policy is active, you can make multiple claims, ensuring continuous financial support throughout your recovery journey. 

Workplace sickness benefits 

Some employees enjoy generous workplace sickness benefits until their intended retirement date. However, others might need to rely on state support, which could prove challenging.  

Tax-free income to alleviate the financial strain 

Losing your regular income, even temporarily, can lead to financial struggles and dipping into savings. Income protection insurance provides a tax-free monthly income up to retirement age if you cannot work due to long-term sickness or injury. Income protection insurance aims to restore your financial situation to its pre-illness state without allowing for undue profit. The maximum coverage amount is typically based on your after-tax earnings minus applicable state benefits.  

Special considerations for self-employed individuals  

For self-employed individuals, no work often means no income. Income protection insurance can be customised to account for fluctuating income, with some policies averaging earnings over the past three years. This ensures that self-employed individuals receive appropriate support during their recovery. 

Cover: costs & options 

Premiums for cover are based on various factors, including gender, occupation, age, health status and smoking habits. Insurers employ the ‘occupation class’ to determine policyholders’ ability to resume work.  

If a policy only offers payouts for those unable to work in ‘any occupation’, the benefits might be short-lived or non-existent. More comprehensive options include ‘Own Occupation’ (which requires being unable to perform any job without considering equivalent earnings from your previous position) or ‘Suited Occupation’ (which allows claims if you can’t perform your specific job).  

Additionally, you can select between level cover or inflation-linked cover: 

• Level cover: This option provides a fixed monthly income, determined at the beginning of your plan, without future adjustments. It’s essential to note that rising inflation could reduce the purchasing power of your monthly income payments over time. 

• Inflation-linked cover: With this choice, the monthly income increases according to the Retail Prices Index (RPI) if a claim is made. 

When obtaining cover, you typically have two options: 

• Guaranteed premiums: These premiums remain constant throughout your plan’s term. If you opt for inflation-linked cover, your premiums and coverage will automatically increase yearly based on RPI. 

• Reviewable premiums: This alternative means your premiums may fluctuate over time. Generally, premiums won’t change during the first five years of your plan but may afterwards. If your premiums increase or decrease, they’ll remain stable for 12 months. 

Making a claim 

How long you must wait after making a claim will depend on the waiting period. Rethinking the Claim Process Opting for a longer waiting period results in lower premiums, but it also means you’ll have to wait longer after becoming unable to work before receiving policy payments.  

Remember that premiums must be paid throughout the entire term of the plan, including the waiting period. Your specific circumstances may cause plan payments to impact any state benefits you receive. This outcome depends on your situation and the state benefits you claim or intend to claim.  

Peace of mind and financial stability 

The market is continually evolving, with innovative new products being introduced regularly. You should obtain professional financial advice if you need more clarification about how your state benefits might be affected. 

Income protection insurance offers a reliable and customisable solution to maintaining financial wellbeing during recovery from illness or injury. Whether employed or self-employed, this insurance provides peace of mind and financial stability when needed. 

Want to know more? We’ll be happy to talk you through everything you need to know, just get in touch!