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What is Income Protection?
Income Protection is a generic term covering a range of insurance products that protect individuals and their families from a loss of income caused by extended periods of sickness, disability or unemployment.
Many people wrongly assume the Welfare State will provide for them in times of need, but the reality is that the State benefits available only provide a very basic level of support and therefore most people in the UK should have additional income protection insurance in place to maintain their existing standards of living if they become sick or endure a disability as a result of an accident.
The hard facts* are these:
- 2.2 million people of working age will be off work for at least 6 months at any one time through sickness or disability
- Over 1.7 million people are claiming Income Support
- Over 2.5 million people are claiming Incapacity Benefit
- Over 2.6 million people are claiming Disability Living Allowance
(Source: Department of Work and Pensions)
Employers, large and small, can and do provide a lot of employee benefitsin addition to the monthly salary, and some will provide discretionary benefits in times of great need, but not all do this beyond 4 weeks and not all outcomes will necessarily be covered, so it is important to provide some level of protection yourself, even if it is a top-up to State Benefits and existing employee benefits.
There are two main types of insurance policies associated with Income Protection:
1. Long Term Income Protection, also known as Permanent Health Insurance
2. Short Term Income Protection, also known as Accident and Sickness Insurance or ASU (Accident, Sickness & Unemployment)
Long Term Income Protection
This type of policy offers long term benefits to the policyholder because it provides them with a guaranteed level of income potentially up to retirement age in the event of an accident, sickness or disability which prevents them being able to work. The maximum monthly benefit payable is usually 65% of a person's annual income, less any benefits that they are entitled to from their employer or the state.
These types of policies can never be cancelled by the insurer and most will allow you to make several claims so long as the circumstances are legitimate. Depending on the premium that you're prepared to pay, the monthly payments can be index-linked to that they keep pace with inflation and the rising cost of living.
Short Term Income Protection
In contrast, Accident and Sickness Insurance policies provide replacement income usually for between 12 and 24 months in the event of accident or sickness. Typically many policies offer deferred periods to keep monthly premium costs low, which mean they do not provide cover for the first 30 or 60 days .
Some insurers also offer Unemployment Insurance, either as a separate standalone policy, or more usually combined with Accident and Sickness Insurance to create an ASU Policy, though these tend to be restricted to 12 months' worth of benefits . These products are not suitable for people who are self-employed.
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