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Top 5 mistakes to avoid when buying income protection

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Written by:
23/12/2013
Income protection is one of the most important types of financial protection you can have, but it can also be one of the most confusing to buy. Read how you can avoid making the common mistakes.

Income protection is an insurance policy that pays out if you are unable to work due to injury or illness.

The money paid out can be a crucial lifeline for you and your family so getting your policy right is essential.

Tom Conner, director at Drewberry Insurance, says: “The last thing somebody wants if they are off work long-term sick is to find out an insurance policy they have paid for each month isn’t going to do what they need it to. It is important to thoroughly research the market to ensure you have the right policy for your needs, or speak to a specialist protection adviser.”

Here, are five mistakes to avoid:

Mistake 1 – Failing to get ‘own occupation’ cover

An own occupation definition covers you if you are unable to do your own job due to accident or illness. Some cover offers an any occupation (where you have to be unable to do any job at all to claim), or activities of daily living, where you have be to unable to perform a number of set tasks, such as walking unaided or using a pen or keyboard, which are much harder to claim on.

Example: Chris Hargreaves, a 37-year-old chauffeur from Manchester had his income protection claim declined even after suffering a rectal ulcer and pulmonary embolism that required over six months of hospital treatment. Chris was so furious that he started an online Twitter campaign to highlight the importance of own occupation cover, that has attracted thousands of followers – @Scotprovsaysno

Mistake 2 – Income protection might be better for you than critical illness cover

Five times as many people buy critical illness cover compared to income protection, but income protection is often more suitable for many people, as it covers the income that supports everything else in life if you are unable to work, rather than covering the individual for a specific illness. While critical illness covers major life threatening illness such as cancer and strokes, it does not cover many other reasons that keep people off work, including stress, depression and muscular problems like a bad back or broken leg.

Mistake 3 – Don’t give up because it seems expensive

While long-term income protection cover is the most comprehensive, consumers should also consider lower cost alternatives if this does not fit within their budget, such as short-term cover which can usually cover you for between one or two years if you are unable to work (comprehensive cover can pay out until you reach retirement age).

Pricing example: 

Payout Length Monthly Premium Insurer
2 years maximum £19.61 LV=
5 years maximum £36.74 Legal & General
Long term – to age 68 £42.28 Bright Grey
Cover: £2,000 per month (not indexed for inflation); policy term to age 65; 13 week deferred period; guaranteed premiums.
Individual: 35 years old; non-smoker; office based worker.
Source: www.drewberryincomeprotection.co.uk

 

Mistake 4 – Delaying taking out cover until a later date

Recent research from Drewberry Insurance shows that the total cost of cover can be lower when taken out at a younger age, even though you are covered for many more years. A 25 year old taking out cover until they are aged 65 can save nearly £4,000 over the term of the policy, compared to someone taking out cover at age 50 until they are 65.

Pricing example: 

 
Age Premium Insurer
25 £25.38 a month (£12,182 until age 65) Bright Grey
30 £32.40 a month (£13,608 until age 65) Aviva
35 £42.60 a month(£15,336 until age 65) Aviva
40 £53.18 a month (£15,954 until age 65) Scottish Provident
45 £69.02 a month (£16,564 until age 65) Scottish Provident
50 £89.04 a month (£16,027 until age 65) Scottish Provident
Cover: £2,000 per month (not indexed for inflation); policy term to age 65; 13 week deferred period; guaranteed premiums.
Individual: Non-smoker; office based worker.
Source: www.drewberryincomeprotection.co.uk
 

 

Mistake 5 – Confusing income protection with payment protection insurance

PPI is not income protection. Although they look and sound like similar policies, PPI plans usually have a maximum payout period of only 12 months whereas income protection policies can payout for much longer periods, even up until retirement age if you cannot return to work.

PPI plans come up with a range of automatic exclusions and are annually reviewable, which means it is the insurers right to increase your premiums or even cancel your cover altogether, which could leave you in a particularly bad position trying find another insurer if you’ve suffered a medical condition.

Income protection is usually a fixed contract for a set number of years and the terms of your cover can not be changed by the insurer. Most income protection insurers publish their paid claim statistics on a regular basis, with the average being above 90% of submitted claims.

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