Income payment protection insurance
A guide to income payment protection insurance
A new age-related format has greatly increased the attractiveness to younger policyholders of income payment protection insurance, which pays out a monthly income for up to 12 months if you are unable to work as a result of ill health or involuntary unemployment.
The price reductions have been so significant that they have shifted the goal posts in the long-standing debate about whether income payment protection insurance provides value in comparison to a similarly named product called ‘income protection insurance’- which offers much longer-term health cover but doesn’t cover involuntary unemployment.
Many protection experts have traditionally argued that the longer-term cover offered by income protection insurance means that it provides superior value. But now the pros and cons are much more finely poised, and the number of cases in which income payment protection insurance is likely to be the preferred option for younger people has increased.
How Does The Age Related Income Payment Protection Insurance Work?
Like standard income payment protection insurance, the age-related product is not directly linked to a mortgage or other loan, but protects the policyholder’s general lifestyle against the possibility of being unable to work as a result of an accident, illness or involuntary unemployment.
The policyholder chooses the level of cover they require at outset, subject to stated maximum limits, and pays a monthly premium by direct debit. If they are off work for 30 consecutive days on health grounds or because of involuntary unemployment they are entitled to monthly benefit payments, which backdate to day one and continue for a maximum of 12 months.
Premiums for both the standard and age-related income payment protection insurance product are not affected by a policyholder’s smoking habits, gender or occupation, but whereas the standard product also disregards the policyholder’s age, the age-related one does not. Indeed age has such a huge impact on the latter product’s premiums that young policyholders can pay well under half the premium that they would have to pay on a standard income payment protection insurance policy.
Furthermore, premiums with the age-related income payment protection insurance product do not increase just because the policyholder gets older. The only age that matters from the point of view of calculating the premiums is the policyholder’s age at the time that they take out the policy.
The reason that the specialist providers who offer age-related income payment protection insurance are able to quote such attractive terms is that they know that younger policyholders make fewer claims. They are less likely to go ill and, if they lose their job, they tend to find a new one more quickly.
Beware Of The Exclusions
But the age-related income payment protection insurance product still includes the same exclusion clauses as standard income payment protection insurance, which means that it cannot be considered to offer cast-iron security for everyone.
Of particular importance is the fact that it does not cover medical conditions that existed prior to the start of the income payment protection insurance policy (so-called ‘pre-existing conditions’.) This exclusion is, however, waived if you have not suffered from the condition concerned for two years prior to the date upon which you first became unable to work.
Income payment protection insurance cover is also far less attractive to the self-employed than to those in employment, because the self-employed are not covered for involuntary unemployment unless they permanently cease trading – as opposed to merely experience a quiet patch.
Even employed people can have a major problem with the fact that voluntary redundancy is excluded, because this has become a very common way of exiting employment in some industries.
Other significant exclusions to be aware of include:
-
Claims that you know that you are likely to make when you take out your income payment protection insurance policy.
-
Self-inflicted injury, including the consequences of drug and alcohol abuse.
-
Involuntary unemployment which results from your own misconduct.
-
Involuntary unemployment if you were not in continuous work for six months immediately before your employment ended.
Other Downsides
Even the very best income payment protection insurance does tend to have fairly restrictive maximum benefit limits, although there is nothing to stop those with mortgages or other loans taking out mortgage payment protection insurance or loan payment protection insurance in addition – both of which work along very similar lines.
It is also important to realise that there is no concrete guarantee that the premium rates quoted at outset for any income payment protection insurance will remain unaltered throughout the policy term. There is always the possibility that the income payment protection insurance provider will find that its overall claims bill is coming to more than it had originally anticipated and will raise prices for all policyholders to compensate for this.
But arguably the greatest downside with all forms of income payment protection insurance is that it only pays out for a maximum of 12 months. This should prove long enough for young policyholders to find another job, but there is no escaping the fact that the more serious accidents and illnesses can keep people off work for much longer than this. Indeed, in the worse case scenario they may never be able to work again.
Anyone who is concerned about this issue should also pay due attention to income protection insurance. In some cases this will prove better value than age-related income payment protection insurance, but in other cases it will not. Much will depend on individual circumstances.
The Income Protection Alternative
Unlike age-related income payment protection insurance, income protection insurance does not cover involuntary unemployment at all. It does, on the other hand, offer much longer-term protection against illness and injury. It can pay out right up until the time that your recover or, if you fail to do so, up until the end of the policy term – which is typically your intended retirement date.
Another advantage of income protection insurance is that many providers offer the opportunity to have premium rates that are guaranteed to remain fixed throughout the policy term, regardless of whether overall claims experience turns out to be worse than originally predicted.
But income protection insurance premiums can vary hugely according to individual circumstances. The product’s underwriters do not normally just take age into account, but they consider a range of other factors such as medical history, smoking habits, gender and occupation. A roofer or window cleaner could therefore be charged four or five times more than someone with a sedentary occupation to reflect the fact that their job involves a much greater personal injury risk.
Another point to bear in mind is that most income protection insurance policies do not start paying benefit until after an initial ‘deferred period’ has elapsed, and this often lasts six months in the case of the more affordable policies – whereas age-related income payment protection insurance pays out after 30 days and backdates payments to day one.
Age-related income payment protection insurance can therefore prove a more attractive alternative to younger policyholders, especially those who have been quoted a higher than average premium by income protection insurers. If income protection premiums are outside their budget, they may consider that it is better to have shorter-term health cover they can afford than to have none at all.
The Importance Of Protecting Your Income
Although the exact choice of product will depend on individual circumstances, there is widespread agreement amongst financial planning experts that it is important for most people to have some insurance mechanism in place to protect against the financial consequences of losing their income.
It is all too easy to take one’s income for granted, but the chances of becoming incapacitated are far greater than generally imagined. For example, up to 80% of the adult population will develop significant back pain at some point during their working lives.
The days of having a job for life are also long gone. In the current marketplace even the most conscientious and talented employees can find themselves unexpectedly becoming the victim of a downsizing or restructuring operation.
Without an income, it does not take long for any savings you have tucked away for a rainy day to disappear. Indeed, most are likely to be swallowed up by the mortgage payments alone within a few months, not to mention the costs of other basic necessities like utility bills, food and travel.
Limited State Safety Net
Unfortunately, the level of assistance that you will receive from the state isn’t nearly as great as generally imagined. Exactly what benefits you will qualify for will depend on your individual circumstances and will take into account factors such as your age, savings levels, and the number of dependants you have.
You may get some help with housing costs and will hopefully receive sufficient
cash benefits to ensure that you and your dependants are actually able to eat, but you can rest assured that it will be a long, hard struggle. Even trying to find the money to travel to a job interview could seem like a crisis.
A minority of those in good jobs will already enjoy the security of being a member of a company-paid group income protection scheme (and it is worth checking with your HR department whether you are a member). Otherwise, the responsibility for making private provision is yours, and the sooner you consider your options the better.
Still not sure about income payment protection insurance?
Download our free guide to income payment protection insurance.
