How does income protection work?

[charliegal]

Hi, I started a thread about life insurance and critical illness cover. I think it sounds like it is a good idea to drop the critical illness and go for income protection instead. I am freelance and dp is an employee. Does anyone have income protection? How does it work and where do I get it from?
Thanks for any help...trying to sort out finances!

bump..know it's boring!

In my opinion (financial journalist, so spend a lot of time talking to finacial advisers), income protection is sooooo much more important than critical illness! It's more expensive, but that's because the cover is so much broader.

Basically, critical illness is designed to pay out a lump sum if you become ill with one of a very strictly defined list of illnesses (and sometimes you have to be a certain degree of ill before it will pay out). You often get a 6 figure sum, but if you're young, this actually isn't going to keep you going forver. Also, most critical illness policies don't cover stress related illness or back injuries, the two most common causes of work absence.

Income protection will pay out a set income (usually between 0.5-0.75 of your income) after a deferred period (usually 3, 6 or 12 months) if you stop working for ANY illness/injury etc. If you are unable to work until retirement, the policy will pay out till retirement, usually with some increase in line with inflation. I cannot overestimate how important most financial advisers consider it to be, yet only about 10% (or some such figure) of the working population have it because it's a boring product that doesn't pay out for the first 3 months or more and only pays a proportion of your usual income. Let me know if you have any other questions and I'll try to answer them!

Wow, hopefully, thanks so much for that. I wonder why my financial advisor told me to get life insurance and critical illness. We are really trying to cut our expenses so I'm shopping around and a few people said it would be better to have life insurance and income protection. The ones I am looking at would cover me for 12 months though- do you think that is a reasonable compromise between being insured up to the hilt and paying for it and not having anything at all?

I'm surprised your financial adviser suggested crit illness rather than IP? Perhaps it is enormously expensive for freelancers - I don't know the exact situation for that I'm afraid, but for dp I would expect IP to be the sensible thing unless he already receives it through a group IP policy at work - worth checking that out. It's definitely worth asking your adviser why he suggested crit ill over IP -he may have had a valid reason that hasn't occured to me.

The usual way to make it cheaper is to increase the deferred period that hopefully was referring to. If you can hang on for 12 months after the accident/illness, then you can get a cheaper quote. Of course, that means that you need savings that will keep you going for 12 months, but then the savings are very useful anyway, as they will also cover you for a period of redundancy or anything else that life can throw your way.
The amount that you actually need to live on is probably less than the amount that you do, by the way, so it would be enough to keep you going for 12 months without the frills and treats in life, so perhaps not as much as you might think.
Or did you mean that the policy would only cover you for the first 12 months of the illness/disability? I'm guessing that you're quite young, so if something happened next year, you would have a very long time to keep going on disability benefits alone.

Thanks Mrs Tittlemouse, I was thiining about payment for only a 12 month period- wouldn't it be hideously expensive to have it for an ongoing period?

Yes, it is expensive, that's why most people have critical illness instead. But as hopefully pointed out, there are lots of ways of falling through the loopholes with critical illness.
We actually don't have any cover yet other than the disability insurance that DH gets from work, just because I'm at home with DD and we're planning on buying a house next year, so there isn't a lot of spare cash. If something happened to me tomorrow, we'd be in a lot of trouble, but we're keeping our fingers crossed until things settle down financially, which I know is not a sensible thing to do!
In terms of where to get it: if you're using your financial adviser, make sure that he/she will search the whole market to get you the best quote (some are tied to specific companies). Otherwise, there's nothing to stop you searching for a quote yourself online. Your DH might already have some cover in his benefits plan at work, by the way.

I'm not sure but I think income protection is really hard to get when you are freelance (I speak as a freelance myself) and even harder to get them to pay out on .

There are also different levels of income protection, which can affect the price of the quote - unable to perform current occupation (i.e if you're a labourer, you injure your back or somesuch, but are able to work in the site office), unable to perform any job (disability too serious to prevent any office or manual work), unable to perform daily living activities (paralysed from the neck down, for example). Obviously the more extreme ones are cheaper, as it is less likely you will be paralysed from the neck down than injure your back and be unable to build houses (if that's what you did!)

Best bet is to ensure you're speaking to an independent financial adviser (not one tied to a bank/insurance/life office) and ask them to research the whole of the market for a number of different policies - different deferred periods and different degrees of illness.

Income for a 12 month period is nice, but actually if you think about it, unless you've got really monstrous mortgage payments etc and would in no way possibly have the money to meet them if you weren't earning, it's not going to make a vast amount of difference to your life. If you have any type of long term illness, you're going to be back to square one. unless your dp's got massive earning potential, in which case I would insure him up to the hilt!

Apologies if this is complex and not terribly helpful! It's an involved subject with lots of variables, but do let me know if you have any more questions - I'll try to make my answers understandable!

Charlie my dp would be able to help with this as he is independant so can offer impartial advice here