Income Payment Protection Insurance
Being self-employed has many advantages, but if you're involved in an accident, then you should consider purchasing income protection insurance which pays a fixed amount each month in lieu of your wages.
For many people, they're unlikely to receive help from the government especially if they are a sole trader business so insurance against unforeseen circumstances can offer you peace of mind.
How Does Income Protection Work?
This type of cover does what it says on the tin. The insurance company will pay you a predetermined fixed amount if you satisfy the terms of the policy. The Income Protection Insurance (IPI) policies used to be known as Permanent Health Insurance policies (PHI).
Most policies only start paying out after 30 days of you falling ill or incurring a disability meaning you can't continue your usual daily work. The insurance is not designed for short-term coverage but for long-term issues that affect your ability to bring income into your household.
Most policies allow you to protect up to 50% of your monthly income although some allow you to increase the value. The more income you protect in terms of absolute value, the higher your monthly premiums will be.
As most insurance companies are relatively flexible you can choose for how long the insurance continues for whether it be for a year after you stop working, until retirement or with some policies until you die.
Why Have Protection Insurance at All?
Of course, it depends on your circumstances, and you should always seek professional advice on this type of cover. Most people taking these policies just can't rely on statutory sick pay from the government or their savings if they can't work due to illness or as a result of an accident.
These are not health insurance schemes as such, and they won't pay out for hospital bills as other insurances do. They only pay you a fixed sum each month based on the premiums you pay. They are also not mortgage protection schemes although you can settle your mortgage with the money you receive from the policy. Most people use them for the following reasons:
- To cover against loss of earnings when self-employed.
- To have peace-of-mind knowing there are backup funds if they become ill or suffer a disability.
- Knowing that most of their bills get paid if they cannot work.
- To guard against unforeseen circumstances.
- To put in place an insurance scheme not covered by their company.
Accident Sickness Unemployment ASU Cover
Not everyone is self-employed, and regular PAYE employees can also protect their income against unemployment and their mortgage.
These types of policies know as PPI (Payment Protection Insurance) were sold in the 1990s generally to people who did not need them when the economy was strong.
As times have changed, the prospect of being made redundant or losing your job has increased. Nowadays many people are not only taking out mortgage protection policies and unemployment cover but a combination of insurance to protect them against almost all eventualities.
Qualification for Cover
As with all insurance income protection is not available for everyone in every job type or industry. If you are an employee you will need to be working at least 16 hours per week and if you are self-employed have been working for six months or more. These policies do not usually cover pre-existing conditions much like health insurance.
Income protection policies are classed as long-term insurance under the Insurance Conduct of Business (ICOB) rules as defined by the Financial Conduct Authority (FCA). The policyholder can cancel the contract within 30 days and entitled to a full refund of any premiums paid.
The policy also only pays out when you have an accident or fall ill and not for any other reason. It's therefore wise to check your plan on what exclusions there are and when exactly they will pay out.
When you change your job for whatever reason, you will need to inform the insurer of any changes in your circumstances. Many insurers make policies null and void if you have excluded vital information either in the application process or during your time since your insurance was accepted.
Typical Premiums Examples
Due to the nature of the insurance (in that it may be paying out 30 years of money to you if you fall ill) the premiums can be expensive. They also rapidly increase as you get older as the risk is steadily increasing.
Here are four examples which exclude unemployment cover. These are illustrative only and do not constitute an offer, contract or financial advice which you should seek yourself.
Premium Example 1
A 45-year-old earning a net £4,000 per month wanting to protect a £2,000 salary. £70 per month premium with cover starting from day 30.
Premium Example 2
A 35-year-old earning a net £4,000 per month wanting to protect £2,000 of salary. £55 per month premium with cover starting from day 30.
Premium Example 3
A 45-year-old earning a net £4,000 each month wants to protect £2,000 of their salary. A premium of £45 per month with cover starting from day 30.
Premium Example 4
A 35-year-old earns a net £3,000 per month and wants to protect £1,500 of their salary. Premium approximately £45 per month with cover starting from day 30.
These rates vary by insurer and by policy conditions so check all wording carefully when searching for income payment protection insurance quotes before you commit.