Before we get into income protection and why it is a really useful insurance to have, let’s quickly summarise what it does. Income protection insurance is a way to protect your income if you are off work sick for any length of time. In general, the idea behind income protection is that it will give you enough to pay for everything you need until you are fit enough to return to work, you retire, you die, or the policy runs out; whichever comes first.
However, there are some events in life that income protection will not cover. But before we look at those, it’s important to understand how income protection works and what your options are.
How Does Income Protection Work?
Income protection is a hugely beneficial insurance to have as, essentially, it pays to keep your household running if you are unable to work.
Sometimes, when choosing insurance cover, people choose to take out other policies such as critical or terminal illness cover as they can be easier to apply for. However, income protection insurance has some great advantages over other types of insurance. To understand why, let’s look at how income protection works.
If you decide to take out income protection, you’ll have to do a few sums. You’ll need to work out what your outgoings are; how much income you’ll still have coming in after you lose your job (for example, if you have a partner, what their income is, and how much you might be entitled to in incapacity benefits); and how much, and for how long, your employer will pay you statutory sick pay and any other benefits.
To get cover, you will also need to give the insurer some other crucial bits of information such as your age, job, lifestyle and hobbies. The insurer will use these factors to calculate how much your policy will cost you, based on how much of a risk they believe there is that you may fall ill or be involved in an accident.
Does Income Protection Cover Redundancy?
The short answer to this question is that, no, it won’t. That doesn’t mean that you do not have some options in the event that you lose your job, however. It should be stressed though, that you need to be very careful when you are looking for a policy to cover redundancy.
Before you go ahead and start paying out for extra policies, check what cover you already have. Because there have been some under-hand selling practises involving payment protection insurance in the past, you may be pleasantly surprised to find out that you already have cover for your mortgage, loans, and/or credit cards without knowing it. If you find out that you have absolutely no cover, then you still have a few options.
Payment Protection Insurance
Payment Protection Insurance (PPI) is one such option. This is also sometimes called Accident, Sickness and Unemployment (ASU) cover. This type of cover tends to pay out for 12 to 24 months. PPIs have got a bit of a bad reputation over the last few years but it should be pointed out that the PPIs themselves were not the problem; it was their mis-selling. So, definitely check you car or personal loans paperwork for any PPIs you are unaware of as it can provide good protection.
Mortgage Payment Protection Insurance
Another option would be Mortgage Payment Protection Insurance (MPPI). In general, MPPI doesn’t last long, usually starting around three months after you lose your job and only lasting 12 months, but 12 months’ cover is still better than nothing.
Short-Term Income Protection Insurance
Short-term income protection insurance (STIP) works in the same way as a PPI in that it replaces your work income for a certain number of months, usually between 12 and 24 months.
Many people think that because they have income protection insurance, they are covered for redundancy; however, this is absolutely not the case. Therefore, if you are looking for protection to cover redundancy, it is important to look at one of these other policies.
What Won’t Redundancy Insurance Cover?
To be honest, it might be easier to ask what it will cover, which is why you need to be careful when buying it in the first place. That’s not to say that you shouldn’t buy insurance to protect yourself from redundancy, but just that you need to be careful.
It’s also important that you buy it at the right time. If you buy it after you have been told you’re going to be made redundant, then it’s highly unlikely that the policy you get will pay out. Additionally, there is no point buying it if you are on a zero-hours contract, or you are self-employed.
Finally, beware – there may also be a whole heap of exclusions included in the policy itself. Below are a few examples of exclusions regularly found, but your policy may include others.
- Age
- Students
- Contract workers
- Self-employed workers
- Part-time workers
- Joint borrowers
- Existing medical conditions
- Stress
- Casual workers
- Mental health problems
All of the above needs to be taken into account when deciding whether a redundancy protection policy is right for you.
What Happens If the Policyholder Dies?
There is one more point about income protection that anyone thinking of taking it out should be aware of. Unfortunately, none of the above three policies will pay out if you die. You are paying for a policy that will only pay if you’re made redundant and for no other reason.
This means that when people find out that if they die, the money will not be paid, they often lose interest. However, it has to be said that this could be a bit of a short-sighted attitude.
While it is true that the premiums you have paid are lost if you die, think for a moment how much more you and your loved ones could lose if you do not have income protection.
Summary
So, to summarise, check the policy small print for your mortgage, car loan and other loans to make sure you don’t already have cover for redundancy. If you don’t, then think about getting some redundancy cover on top of the income protection you should already have. It sounds like an added complication, but it could turn out to be one of the best investments you ever made.