Far too many go to work taking an enormous risk: they have no protection if a long-term illness or disability stops them doing their job. With readily accessible savings at a low level, few appreciate the real problems that may arise.
Fortunately, there is a solution in income protection insurance or IP for short. It should be the cornerstone of financial planning. So many are vulnerable to financial ruin but do not realise the amount that should be set aside. “Millions of households live on a financial knife edge,” says Justin Harper at LV=, the largest friendly society.
The concept of IP arose through a paper written by the Victorian MP for Stroud, George Holloway. In 1878, his vision was “securing to members of friendly societies an income during sickness or temporary disability”. On such principles, he helped to establish the Original Holloway Friendly Society, which became the first provider of IP.
This brainchild of a great social reformer was initially designed for agricultural workers in his constituency. Today Holloway contracts are still offered. Their unique aspect is that part of the premium goes into a pot which makes a payment when a policy matures. Therefore expect such quotes to be higher but the benefit will be a small rather than nil sum upon reaching retirement.
The Association of British Insurers say there are 3.2m IP policies in force of which 1.1m are individual, not part of an employer scheme.
Often only two areas of protection are considered – critical illness and term insurance – but IP is vital to pay the mortgage, fund other loans and maintain the lifestyle enjoyed before the claim problem arose. ‘Critical’ depends upon medical definitions and term will cover your loved ones after your death.
“IP underpins everything. If you lose your ability to work because of illness or injury, it’s not long before things start to unravel,” say NFU Mutual. IP will provide a regular income if you are prevented from earning your living.
If you are employed, check what your employer would offer including for what period of time and for remuneration at what rate. For the self-employed, protecting your income is crucial.
Fortunately, there is a slow but growing recognition of the importance of IP with 10.7 per cent more taken out in 2015, the last year for which figures are available, according to Swiss Re. When considering the most appropriate policy, check not only for what is included but for the exclusions. For example, insurers may not cover for injuries that arise from dangerous hobbies.
Do not under-estimate the amount of money required as, apart from limited state assistance, it may be the only financial help received. In 2015, £131m was paid, which averages £9,799 per policy but some claimants will secure funding for several years.
Payment is usually on a monthly basis and, with both salaries rising and higher household costs, the sum insured should be reviewed regularly.
One of the most important considerations is to look for an ‘own occupation’ policy that will pay if you are unable to do your specific job, as opposed to be any form of employment. A dentist, for instance, trains for years to gain their qualifications and, if there should be a problem which means they can no longer practice dentistry, they cannot be expected to have a policy declined on the grounds that they have the ability to do any work, such as a council gardener.
The old fashioned definition included a check on the number of activities of daily living that could be undertaken.
A variation to be avoided is ’suited occupation’, where the insurer will assess if you are able to do another job to which you are ‘suited’. Drewberry Insurance discovered that a high proportion of comparison websites use this definition. Instead it is far better to take the ‘own’ route where the payout is based on your ability to perform your current role.
Emma Thomson, head of customer care at specialist broker LifeSearch, recommends looking also for a ‘benefit guarantee’ which is relevant for those whose income can fluctuate after taking out cover. Increasingly insurers are introducing this feature. British Friendly, for instance, recently enhanced its cover by including carer’s cover and death benefit.
The former pays out in the event of having to provide care for a partner or child as this can have a real impact on a person’s income.
LV=, in addition to introducing death cover as an extra, now offers specific additional payments for fractures and payment holidays in the event of redundancy. This ensures cover can remain in place rather than be cancelled owing to a lack of funds.
IP can be complicated and so that you do not want any claim ruled inadmissible, seek the professional help of an experienced independent insurance broker. One question to ask is the proportion of claims that are paid, such as 97.8 per cent by the mutual, British Friendly. One of the key reasons to decline is through non-disclosure where a pre-existing medical condition has not been revealed.
Aviva’s Julie Higman, their IP product manager, says that in the event a customer is unable to work owing to ill health, “there is so much more in the way of support that Aviva now provides”. She says the insurer can help even before they are due to pay with an experienced claims team that includes clinicians and specialists in rehabilitation, psychiatry and physiotherapy.
Check if an adviser already known to you can help. Skipton Building Society, for instance, offers IP through its financial advisers which involves a review of personal and family circumstances.
Keith Jackson at Allied Financial Services in Leeds has recently been advising a single mother and recommended, among other plans, an IP policy based on current salary with the deferment period (the date when payment starts) to match the employer’s arrangement.
The shorter the deferment period, the higher the premium paid. Therefore decide on the date depending on how long any company sick pay will run and if you have any savings that could support short-term expenses.
Multiple claims can be made on IP whereas critical illness pays out once. Any sum can be insured with the latter but IP is tied to the level of earnings on a gross (pre-tax) basis.
Aviva says the top reasons for claiming are psychiatric, orthopaedic, neurological and rheumatological conditions, followed by cancer. The cost of IP varies enormously and so shopping around is essential. The younger you are at inception of an IP policy, the cheaper it is to arrange, tips Sophia Harris of Allied Financial Services.
She has organised cover for Ian Lilley, self-employed with a gardening business. In his 40s, Lilley had no IP but is now covered until retirement age with a four-week deferment period and escalating benefit.