Income protection can offer you a financial security net if you are unable to work due to illness for a sustained period of time. It works in addition to statutory sick pay and alongside workplace sick pay schemes to offer you the best and most well-matched replacement income.
Statutory Sick Pay (SSP) is an amount the government will make sure you get if you are ill for more than three days and your work won’t additionally cover you. Everyone is entitled to SSP. Currently, SSP is £89.35 per week which may not be enough to secure mortgage payments or the majority of household bills.
Statutory Sick Pay also only pays out for a maximum of 28 weeks.
There may be a scheme in place that your employers have provided you. This can be anything from full pay for many years to a small percentage of your pay for the first few weeks – it’s completely up to your employer to determine their package. It’s always worth checking your contract to see what you are entitled to.
Usually, your company’s sick pay scheme will incorporate your SSP as well, meaning that you won’t get a full 28 weeks of SSP once it is finished.
You can also rely on savings to cover your financial outgoings if you fall ill.
Let’s say your employer has a sick pay scheme which entitles you to full pay for the first six months of being ill, half pay for the three months after that, then nothing.
Here’s a graph:
This graph shows the difference between the amount paid via SSP (the pink colour) and the amount from the proposed work sick pay scheme (in blue). The results are based on you earning £20,000p.a., falling ill on January 1st, and being out of work for the whole year. Note how for the last three months you have no income from either scheme.
Even in its best month, SSP pays less than £400 towards your bills, before it tails off and stops mid-July. A work sick pay scheme keeps you at full pay until the end of June, and then gives you a few more months at half pay.
After this, there’s no more sick pay and you are left out on your own.
Income Protection (IP) is an insurance policy which pays out up to 65% of your salary tax-free for an extended term (usually two or five years, or even all the way up until retirement age - depending on the policy you set up). It also includes a deferment period, which means it doesn’t start until you need it.
Why sixty-five percent?
Income Protection is not meant to replace an actual working income. It is also not designed to be more than your monthly earnings so taxation is considered. As income protection pay-outs are not taxed, 100% of your monthly earnings would actually see you ending up with much more money each month. That is considered a determent to returning to work (and we have to agree, we too would capitalise on that).
As income protection is not subject to income tax, the 65% paid out is gross, rather than net, and for most people the amount will be close to a full monthly salary payment as far as cleared money in your bank account is concerned.
Should you be receiving any sick pay from a work scheme, then IP will pay out the difference between that and the 65%, however, it works in addition to SSP, and is not affected by those payments.
The Graphs have now changed to look like :-
These two charts clearly show how Income Protection (in green) tops up the lower values to give a net amount close to a full month’s salary.
In the first chart (Statutory Sick Pay with Income Protection), the insurance is needed for the full year, topping up the small SSP amounts. Note that the income protection ignores SSP - for a time, the total income might exceed a normal monthly salary!
In the second chart (Work Sick Pay with Income Protection) the insurance only starts paying out in July, to cover the shortfall for three months before entirely taking over in October.
There’s little doubt that Income Protection is a clear need in the first example, and though the first six months of security in chart two are an excellent buffer, a longer illness would leave you struggling if IP was not in place to cover the later months (or even years).
Deferment is a voluntary period you choose that delays the Income Protection kicking in until it is needed. In the SSP example above, there’s really no room for deferring as the extra money is needed from the very beginning - but clearly IP is not required for the first six months in the second example, therefore a six month deferment period should be set up.
Deferment will significantly lower the cost of your premiums and if you can afford to put one in place, you should definitely do so!
Talking to one of our advisors will give you a clear picture on what would best suit your needs. They’ll be able to talk you through the options and tailor a solution to fit your personal situation.
What happens to Income Protection once I return to work?
Once you are recovered and back to work, the policy stops paying out and you return to paying premiums as normal.
You need to be back at work for six months before you are able to claim for an IP pay-out again, should be become unable to work, and then any further time away from work is treated identically to the first claim - there’s no need to start up a fresh policy.
What about my sales bonuses?
If you have a job where your basic salary is low, and you rely on bonuses or other extra income schemes to improve on your basic salary, such as sales jobs, or those in the hospitality industry, then be sure to tell our advisor when you call. Many income protection policies do take bonuses and extra income into account and our advisors will be sure to look only at those if it is something you need.
Speak to a qualified advisor, and he or she will be able to tell you all you need to know. Of all the life insurance products, Income Protection is the only one where you cannot adjust your policy based on how much you want it to pay out – IP will always pay 65% of your salary. Getting a lower premium really comes down to the deferment period you set.
I’m self-employed – can I get Income Protection?
Yes, you can! At QuickQuoteLife we are specialists in dealing with Income Protection for the self-employed. Speak to one of our friendly advisors to find out more.