Explaining short term income protection insurance
- 13TH JULY 2007
Short-term income protection insurance can protect your general outgoings against the possibility of being unable to earn an income because of ill health.
You can choose at outset to opt for a maximum pay-out period of either three, six nine, or 12 months – the shorter the period chosen the lower the premium cost.
If you are unable to work for 30 consecutive days as a result of ill health or disability, the policy will pay out a regular tax-free income until the end of the maximum pay-out period selected, and payment will backdate to day one.
In practice most policyholders are likely to feel that it is worth paying slightly extra to obtain the maximum 12 month pay-out period, but there are some specific scenarios for which the shorter-term pay-out periods can be well suited.
Homeowners who have taken out mortgages since October 1995 are not entitled to any state help with their mortgage repayments for the first nine months of unemployment, so a nine month maximum pay-out period can be ideal for plugging this gap.
Similarly, those with individual advisory income protection policies and members of group income protection schemes often have initial exclusion periods at the claims stage known as ‘deferred periods’ which last for three or six months. Having short-term income protection insurance in addition which has a three or six month maximum pay-out period can therefore dovetail nicely.
Short-term income protection insurance involves no initial underwriting process and can be arranged instantly. No-one will actually be declined on health grounds, although it is important to realise that medical conditions that existed before the policy begins (so-called ‘pre-existing conditions’) are not covered – but this exclusion is waived if you have not suffered from the condition in question for two years prior to the first date on which you became unable to work.
Policies are straightforward to understand and there is no need to seek professional advice. All policyholders pay the same flat premium rate, regardless of factors such as age, gender, smoking habits and occupation. This is a slightly lower premium rate than for long-term income protection insurance, but the fact that benefit payments are limited to a maximum of 12 months means that the saving can be a false economy.
It is quite possible to have health problems that prevent you from working for many years or ever again, so the extra cost of long-term income protection insurance can be well worth paying for the peace of mind provided by its ability to pay out for up to 30 years.
But some people’s budgets may simply not stretch to this increased cost. There will also be a small minority of people who have applications for long-term income protection insurance declined on the basis of their answers to a brief medical questionnaire – but they will still be eligible for short-term income protection insurance.
In both cases having short-term income payment protection insurance may well seem better value than having no cover at all at all.
