Income protection is one of the little-known areas of personal finance. Only one in 10 working-age families has this cover in any form, compared with the 23% of households who have bought a pet medical policy.
One reason is that income protection is complex. There are choices in when it starts to pay out, how long it lasts for, what constitutes an inability to work, how much cover to buy and whether to link that to rising prices. Some jobs and occupations are off-limits for cover, but the list varies from insurer to insurer.
A traditional policy pays a regular monthly income until the policyholder's stated retirement age (usually 60 to 65) or return to work.
What work you can return to is a bone of contention. Some policies will continue to pay out until you can resume your former line of work (called "own occupation" policies), while others will stop paying as soon as the insurer reckons you are able to do any form of work (called "any occupation"). Newer products pay out for only a limited number of months – often no more than two years, sometimes as little as six months.
Buyers have to choose a "deferral period" during which no payment will be made after a claim. This can vary from a month to two years. The longer the deferral period, the cheaper the policy, as the insurer reckons you'll be back at work before long and therefore it won't have to pay out much.
The insurer will generally want to know your age, the exact nature of your employment, medical history, cigarette consumption, etc, before setting the monthly premium. In the new-style plans, you will not be accepted if you are in a "high-risk" occupation, but insurers generally ignore other factors. This means those with a good medical record in a low-risk job could end up paying more than previously.
How much these policies pay out depends on what level of cover you buy. The traditional policies have very high annual upper limits – up to £300,000 for some – so will appeal to top earners. Simple plans usually restrict payouts to £1,000 or £1,500 a month, so are more appropriate for average earners.
Simple plans are cheaper – they cover less, but while no two simple policies are the same they share characteristics including easy acceptance, a limited (usually fixed) monthly payout, and a maximum time limit.
One of the most pared-down simple plans is set to launch in mid-September from start-up ESMI (which stands for "Essential Supplementary Medical Insurance").
ESMI boss Andrew Tripp says: "The traditional income protection product is aimed at those who travel business class. This is for budget airline travellers. Our simple plan offers guaranteed acceptance with no occupational additions. We don't cover soldiers in a war zone but the Ministry of Defence does that. We don't load [increase premiums] for smoking. It costs £15.60 a month for £1,000 a month cover, and £21.68 for £1,500. We pay out after 30 days." However, the payouts stop after six months.
Another low-cost policy is from British Friendly, called Breathing Space. There is no financial underwriting, so no health checks. You choose to have your income protected for one, two or five years, with the maximum payout set at £250 per week. It is an "own occupation" policy.
For a 35-year-old who wants to ensure they receive a £1,000 monthly income, the cost of cover would £21.50 a month for one year's cover, £23.50 for two years and £30.00 a month for a five-year benefit period. These rise each year with age.
LV= with its new Sick Pay Insurance has no medical questioning, but while applications are limited to the 17-45 age group, once accepted, they can continue with cover until age 70. It only excludes divers, miners, professional sports people, fishermen and the armed forces. It pays from £500 to £1,000 a month for up to 12 months, ignoring any other money such as state benefits. Premiums are the same for all. They are based on £20 a month for £1,000 of monthly cover, but these increase after five years in line with age.
Mark Jones, LV= head of protection, says: "Sick Pay Insurance is aimed at those who do not traditionally seek financial advice, and are therefore unlikely to take out income protection. We want people to protect their income, with a simple, quality and good-value proposition. Short-term protection can act as an extremely useful stop gap and it is better to have some level of protection than none. However, it is important to understand that there are long-term products available should people feel they might need protection for longer."
According to Scottish Provident, back injury and mental health issues are the most likely causes for an income protection claim, followed by cancer, arthritis and accidents.
