What's in an income protection policy?

What is an income protection policy?

In principle it's fairly self-explanatory. You take out an income protection policy while you’re fit and in work, then if you get injured or fall ill and have to take time off work you can make a claim and receive regular payments to replace your income until you’re able to work again.

You work out how much you’ll need, based on your regular expenses. The amount you’re entitled to when you claim depends on how much you can afford to pay in monthly premiums and there are a few other options to help you adjust the cost.

The main features of an income protection policy

Income protection is often misunderstood. It doesn’t help that policy documents can spend 30 pages or more in describing income protection features. Here’s an explanation of the main ones..

Benefit amount

This is the level of income protection cover for which you’re insured, or, in other words, the amount of money you can expect to receive each month when you make a successful claim. What you’ll get is partly determined by how much you normally earn and the maximum is either 65% of that income or £2,000, whichever is lower. It’s important to note that the 65% limit applies to your pre-tax income. This won’t be far off what you normally take home after basic rate income tax and national insurance, which together amount to 28%.

Benefit period

This is the maximum time for which your policy will pay you under a single claim. The  most common periods are 1, 2 and 5 years. Eleos policies offer you 1 or 2 year periods. If you’re able to return to work before you reach this limit your payments will stop. If you are still unable to work beyond this limit your payments will also stop. Remember: this is the period for a single claim. You can claim as many times as you need to as long as you hold your policy and keep up the premiums.

Benefit term

This is the entire life of your policy. Whatever your age when you take out the policy, it can usually last until your 70th birthday. You can cancel it at any time, but unless you do, or anything happens to invalidate your policy, such as non-payment of premiums, you can stay covered for the whole of your working life.

Premium

This is the amount you pay each month to maintain your policy. It usually increases each year on the anniversary of the policy start date.

Waiting period

Practically all income protection policies ask you to choose a waiting period. This is the time that must pass when you claim, between getting ill or injured and receiving the first of your monthly payments. In many cases, policyholders can get by on their last monthly wage and don’t need immediate payment. Some people receive sick pay from their employer which might last weeks or even months or just the minimum Statutory Sick Pay. Having an income protection waiting period means you can time your benefit payments to start when your sick pay ends.

The longer the waiting period you choose when you take out your policy, the lower your premiums will be.

Definition of incapacity

Generally you have to be physically or mentally unable to perform the duties of your normal job and this inability needs to be confirmed by a doctor or healthcare professional. However, there are usually three levels of incapacity:

Own occupation: you can’t do your specific job

Suited occupation: you can’t do your specific job or any other job suited to your abilities and experience

Any occupation: you can’t work for your employer in any capacity

Own occupation is the most popular choice, because it’s the easiest definition to meet.

Your obligations

What your insurer requires from you boils down to the honesty and accuracy of the information you give (including any changes in circumstances) and the regular payment of your premiums, in full and on time.

Your insurer’s obligations

The duties of your insurer are varied, largely based on good faith. Swift, efficient handling of your claim, consistent, clear communication and compliance with data protection rules are perhaps the key ones.

Limits to your insurance cover

Apart from the waiting period and the benefit period there are some other common limitations you should be aware of.

Exclusions

Income protection exclusions fall into two categories: those that apply generally and those that are specific to you.

General exclusions

Certain health conditions may mean you’re not able to get cover at all, but these are usually limited to very serious illnesses, which make your risk uninsurable.

Most conditions won’t stop you from buying a policy but if any of them is the cause of your inability to work you won’t be covered. These include:

Dangerous jobs - such as working in the fire service, at heights, underwater or with certain types of chemical

Hazardous pursuits - these aren’t related to your job and include extreme sports

Normal pregnancy - pregnancy is not considered an issue of poor health unless it involves complications

Self-harm - if your inability to work is caused partly or wholly by your own actions you won’t be covered, an exclusion that includes self-inflicted injury, failure to follow medical advice and even complications from cosmetic surgery.

Travel abroad - this is a limitation rather than an exclusion, which may reduce the period for which you can receive benefit payments if you’re outside the country when you claim.

Personal  exclusions

These are placed on your policy based on the information you give about your own circumstances and the most common ones are:

Pre-existing conditions - any condition you already have when you apply

Occupational - anything about your particular job that puts you at unusually high risk

Other sources of income

This is not an exclusion, but if you have other sources of alternative income, such as employee sick pay or other insurance policies, the amount you can receive in total can’t exceed the amount of your cover. For example, if you’re insured for 65% with two income protection policies you won’t get 130% of your salary, just 65% in total.

Other types of cover in your policy

The benefits of income protection can cover you in ways you might not expect. These are two examples:

Working persons benefit

If your illness or injury stops you from working in your usual job but you’re able to do other work at a lower wage, you may be entitled to working persons benefit, which will make up your reduced earnings to the level for which you’re insured.

House persons benefit

If you make a claim and become unemployed, a student or a house person while your claim is still being paid, you may not be entitled to the full amount of your insurance but you could receive 50% of your cover. (A house person is someone who takes over housekeeping duties at home.)

Claiming

Your income protection policy will also provide details of how to make a claim, often with a link to an online claim form. Apart from the form itself you’ll need to give the insurer:

• Proof of your income and income loss
• Proof of your incapacity verified by a doctor or healthcare professional
• Any other information and evidence the insurer asks for

Special features

Income protection policies frequently offer flexible options, of which the most common are these:

Waiver of premium - you don’t have to pay your premiums while you have an active claim

Reviewable cover - you can apply to increase your cover during the life of your policy and sometimes you can reduce it.

Payment break - there may be periods when you feel you don’t need your cover, such as if you take a career break or a sabbatical, and rather than cancelling your policy you can put it on hold: both your cover and your premiums will be paused.

Guaranteed insurability option - this allows you to increase your level of cover without going through a new assessment process if a major event occurs in your life such as getting married or having children.

Indexation - your cover automatically increases in line with inflation

Extras

Look out for other benefits beyond financial ones, such as:

Rehabilitation support - insurers sometimes provide resources to speed up your recovery

Discretionary benefits - although these aren’t part of your insurance contract, you’ll often have access to free extras like private GP services and money-saving offers.

Privacy and customer support

Finally, your policy will tell you about:

• Your right to cancel
• The role of the Financial Conduct Authority and the Financial Services Compensation Scheme is protecting your money and your interests
• How the insurer complies with data protection legislation
• How to contact customer support
• How to make a complaint, first through the insurer’s internal mechanism and, if that doesn’t solve your problem, by contacting the Financial Ombudsman Service