Avoid the cost of redundancy

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With almost 2.7 million people unemployed and many more workers anxious about job security, income protection could offer valuable protection if you’re unable to work.

According to figures from the Office for National Statistics, the level of UK unemployment stood at 2.63 million between Janauary and March 2012.

As there are still concerns about the strength of Britain’s economic recovery, those who are currently employed may be able to gain reassurance about their financial future through income protection.

The basics

So, what exactly is income protection? Quite simply, it’s a kind of policy intended to pay a tax-free income to those who are unable to work due to illness or injury and in some cases, unexpected redundancy.

However, there can be some confusion when it comes to different types of income protection. With so many products on the market, the premiums and levels of cover will vary.

Unfortunately income protection won’t replace a person’s entire income, but it can supplement up to 75% of it depending on the policy type. Although this may not allow policyholders to continue the same lifestyle they had become accustomed to, it could help them meet financial obligations.

Short-term income protection

This type of policy, also known as accident, sickness and unemployment (ASU) cover, only pays out for a determined period – typically 12 months – even if a person is unable to return to work after this time.

Unlike some other types of policy, short-term income protection may cover those who also unable to work through redundancy.

Despite this, short-term policies tend to be the least costly form of income protection insurance.

Longer term income protection

Also known as permanent health insurance, this type of policy covers those who are unable to work through illness or accident – though not unemployment.

With a long-term policy, however, the insurer should continue to pay out until the policyholder can return to employment or receive a retirement income.

In contrast, any statutory sick pay from an employer last for a maximum of 28 weeks.

How income protection can help

Without income protection, a family could be left in a serious financial bind if one of the wage earners becomes unable to work.

For a family with two wages, the household income could be suddenly cut in half. The consequences could be even more serious if a family relies on just one income.

For those in a relationship, income protection could help ensure the policyholder’s partner won’t have to take another job in order to make ends meet.

What to watch out for

Despite the benefits of income protection, there may be a number of possible exclusions and technicalities.

Most policies will have small print that excludes claims for unemployment for up to four months after taking out the policy. The exclusion period is the amount of time a person needs to be unemployed before the policy kicks in.

This is primarily intended to prevent fraud as some people may know when they will become unemployed and take out a policy preemptively.

Those who have bought an income protection policy from a bank that is tied to a mortgage or loan may find that an independent supplier will be less expensive.

The excess period is the time from the day the claim is made until the payout. People in a stable financial position could consider setting a longer excess date as this could lower premiums.

Also, note that some policies won’t pay out if the insured person can’t work again in their current field but could find employment by switching to another industry. Not all policies have this stipulation so it would be wise to read the fine print if changing careers isn’t an option.

With such a vast market, picking the right policy can be confusing so it’s wise to speak to an adviser and learn all you can before selecting a policy.

**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**

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