Securing Your Income

By Liza Mathers

Also known as permanent health insurance, income protection pays out a monthly tax-free sum if you suffer loss of earnings because you are injured or too ill to work. You pay a monthly premium in return.

The payout is less than your normal earnings because it is free of tax and the insurer doesn't want to give you too much incentive to stay off work.

Decide whether you need income protection by working out what will happen if you can't work. Your employer may pay Statutory Sick Pay or something more generous. Find out what you're entitled to, as this affects whether you need income protection. If you're self-employed, your income may almost certainly cease so you need some income protection.

The state offers some benefits, such as Long Term Incapacity Benefit, but they don't pay out in the short term, and may be means tested.

After you work out how much money you receive if you become sick or injured, think about how much you need to cover your outgoings, such as your mortgage, council tax, and other bills. If you have savings and/or investments, or your employer provides generous sick pay, covering these may not be a problem. But if you can't cope with a loss of income, you need income protection.

You have several decisions to make when buying income protection:

Whether you want own occupation or any occupation cover. The former pays out if you can't do your normal job, the latter you can't claim on unless you are too ill to carry out any job. The former is more expensive but usually worth having.

How long you want the deferred period to be. This is the length of time after your incapacity before you get a payout. The longer it is, the lower your premiums. If your employer will give you sick pay for six months, you could defer your policy to pay out after this, for example. Avoid opting for a longer deferred period than you can comfortably cope with just to reduce your premiums, as it could be a struggle.

How long you want the policy to pay out for. It is wise to tie this in with your normal retirement date. The longer the period, the more expensive your premiums.

Whether your premiums are fixed or variable. If you opt for a guaranteed rate, your insurer can't increase your premiums, except in line with inflation, so you get certainty. If your rate is reviewable, the insurer can raise premiums to reflect its overall costs, which may mean you have to pay out significantly more than you'd budgeted for. A renewable rate means premiums are set for a fixed period, which again buys peace of mind.

Preparing for Accidents, Sickness and Unemployment

Also known as mortgage payment protection insurance, accident, sickness, and unemployment insurance (ASU) is the most comprehensive and expensive cover available. It pays out for a limited period - usually 12 or 24 months - and you must wait 30, 60, or 90 days before receiving payment. If you take out all three elements, this type of income protection policy is expensive.

Income protection may be a better option than ASU, as it is cheaper and pays out until you return to work, whereas ASU pays out only for a limited period. You can buy ASU from your mortgage lender but see whether you can find a better deal first by consulting a mortgage broker or financial adviser.

But you may not need every element: Work out what you require and take out only enough to cover what you need. For example, if your employer provides sick pay for six months, you don't need accident or sickness cover and may need only the unemployment part.

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