Income protection policies are designed to pay you an income if you’re unable to work due to illness or if you have an accident
Income protection policies
Income protection policies are designed to pay you an income if you’re unable to work due to sickness or accident. Your employer may provide you with an income protection policy as part of your employment, or you may take one out yourself. It’s sometimes offered to you as part of taking out a mortgage or loan.
Some policies may require that you are unable to work for a specified period (the deferred period) before payments start. When the payments start, they will continue to be paid until you recover, reach your specified retirement age or for a specified period only. In each case, the income payments will stop or reduce if you recover and return to work, start drawing retirement benefits or die.
If you're contributing to a personal pension scheme, you may be able to protect some or all of your contributions if you should fall ill by taking out a pensions contribution insurance policy. This allows you to continue building your retirement benefits when you can’t work due to illness or accident.
The types of protection
There are different types of income protection policies. These include:
- Income protection (also known as permanent health insurance) policies;
- Executive income protection policies;
- Short-term income protection (STIP) policies; and
- Accident, sickness and unemployment (ASU) policies.
Each works in a different way and provides different levels of benefits and options, so you should read any information that you are given carefully to check that the policy is right for you. All policies have limits on the amount that can be paid out. If you have more than one income protection policy, an overall limit will apply to the amount that all of your policies will pay out. The limits are usually expressed as a proportion of your earnings, although other elements can also be built in. The reason for these limits is the moral hazard of having insurance that will provide an income that is higher than you earned or can earn by working.
When the policy will pay your benefits
The definition of when the policy will pay your benefits also varies. For example, in some cases you must only demonstrate that you can't carry out your own occupation. Other policies may specify that you can't carry out any occupation; the cost of this insurance is usually lower reflecting the more stringent test that is applied before you qualify for benefits. If you're able to partially resume your occupation, it may be possible that you still qualify for some of the payment.
If your employer has provided you with a policy that they pay for, any benefits that are paid out in the event of a claim are normally paid to your employer.Your employer then pays these to you through their payroll, in the same way that you receive your pay. These payments are subject to income tax and National Insurance contributions.
If you have taken the policy out yourself, the income that you receive is paid tax-free.
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.