Financial planning is important. You need to have financial goals and make progress toward achieving them. How will you do that if you lose your job due to an illness or injury? This is where income protection insurance can help.
Expecting The Unexpected
Like all forms of insurance, income protection insurance is intended to provide a safety net when your financial situation changes unexpectedly and dramatically. In this case, the specific circumstance you’re protected from is an injury, illness, or accident that makes you unable to earn money.
For the majority of your working life, your income plays a crucial role in your short and long-term financial planning. Income protection insurance steps up to meet your needs if your income is lost.
This setup makes income protection insurance broadly similar to several other types of coverage. Disability insurance, workman’s comp insurance and life insurance all serve similar purposes. The circumstances which trigger these policies tend to be somewhat different. Life insurance, obviously, provides income compensation to your defendants if you die. Disability and workman’s comp insurance is often (but not always) arranged through your employer, and covers medical expenses as well as loss of income.
Forms Of Income Protection Insurance
There are other related forms of insurance coverage that operate according to the same rules as income protection insurance. By default, income protection insurance is planned to provide for you if you are unable to work for long periods of time or until retirement. A similar policy designed to cover shorter spans (usually up to one year) is called short-term income protection insurance. This covers income lost due to redundancy as well as illness.
Payment Protection insurance comes into play during similar circumstances, but it is designed to provide only enough money to meet certain predefined expenses – typically a mortgage. This limited form of insurance is generally much more affordable than income protection insurance.
How Income Protection Premiums Are Set
Income protection policies are based on your current income, so your premiums will change if you change jobs or get your pay raised or reduced. Insurers will take your health and age into account when setting an income protection premium – coverage becomes more expensive as you age.
There are three factors you can control to reduce the cost of income protection insurance. First, you can reduce the percentage of your income covered by your policy. Second, you can narrow the range of occupations covered by the policy. Insurance that takes effect only if you are unable to work in any job whatsoever is cheaper than coverage that applies to your current job. (This is called “own occupation” insurance.)
Finally, you can cut premium costs by selecting a longer deferred period. This is the length of time between your claim and start of payments, which can generally be set anywhere between one month to one year. Longer deferred periods require lower premiums, but they force you to rely on alternative financial resources until the policy starts to pay out.
Income protection insurance isn’t a type that everyone needs to carry. If you’re confident in the alternate resources available to you without an income (savings, family support, sick pay, etc.), you might get by without it. For more comprehensive protection from financial adversity, taking out this sort of policy is a wise course of action.