Income Protection Policies

On an average working day, six million people in the UK are reported as being absent from work due to sickness.

The number of people of working age who were receiving Incapacity Benefit from the State stood at 2.6 million in 2004. That’s an increase of 10% since incapacity benefit was introduced in 1995.

If an injury or illness meant you were unable to work, could you still pay all the bills?

Most of us just assume that we will always remain fit and healthy and never have an accident or illness that could prevent us from working. But if we weren’t so fortunate, just consider what provision you currently have in place, if any?

The situation can be bad enough for employees in steady nine-to-five jobs. They might be entitled to Statutory Sick Pay, but only if the qualifying conditions are met. Alternatively, they might be one of the 2.6 million people referred to above who are eligible for State benefits in the form of Incapacity Benefit (short and/or long term).

But there’s no guarantee that an employee would receive any State assistance. And, even if they did, would it be sufficient if there were no other provision from their employer?

If you are self-employed running your own business, the situation could be considerably worse, particularly if your absence from work means that most or all of your business’ turnover dries up.

Fortunately, there is a product called income protection insurance which can help address this problem. Income protection is also sometimes referred to as PHI (Permanent Health Insurance).

Income protection insurance can be taken out if you are employed, self-employed or a “house person.” It provides you with a monthly income based on a percentage of your earned income if an illness, accident or injury stops you from working for an extended period. It typically continues to pay a benefit amount until you return to work or reach retirement age.

There are different types of income protection contracts, but typically the benefit is based on a percentage of your income and most contracts let you choose whether the amount paid will stay the same or automatically increase each year in line with a fixed percentage or recognised index.

As a business owner of a limited company, you can usually choose whether the premiums on the policy are paid by you personally, or by your company. If you pay them personally, then any benefits paid out by the policy when you are sick will go directly to you and will be tax-free. If your company pays the premiums then any benefit will normally be paid to the company to help compensate the business for your absence.

Income protection policies come with a deferment period. This allows you to choose how long you are prepared to wait to start receiving the benefit after stopping work. The longer the deferred period, the lower the premiums will be.

Some income protection policies will also continue to pay you a reduced amount if you return to work but have to take a lower-paid job.

Without your income, severe financial hardship could soon follow for you, your family, and your business. So, if you want peace of mind and would like to assess your current situation it makes sense to talk to an independent financial adviser about protecting your income with an income protection policy.