Opinion & Analysis
Kara Gammell – Income Protection: Myths Vs. Facts
30 Apr 2019
Over the Easter weekend, we hosted a barbecue for family and friends. The conversation eventually turned to work and what I had been writing about recently. I told them about a piece that I had written about the importance of protecting your family financially should the worst happen.
Sure, they all had life insurance, thanks to their mortgage providers insisting upon it. But when it comes to wills, it seems my group of guests are much like the UK population as a whole: fewer than half of them had wills already drawn up. Research from consumer group Which?, has found that 54% of UK adults don’t have a will, and 5.4 million people have no idea how to make one.
To make matters worse, none of them had an income protection insurance policy. This type of cover is designed to support you if you can’t work because you’re ill or injured. It ensures that you continue to receive a regular income until you retire, or are able to return to work. According to Which?, the one protection policy every working adult in the UK should consider is the very one most of us don’t have – income protection.
The thing is, all of these people we were hosting on that unseasonably warm April day were parents. What’s more, they are intelligent, well-educated and have successful careers that provides above-average incomes.
Yet, none of them had taken the steps to financially protect their families – and they aren’t alone.
Sixteen million people in the UK are under- or uninsured, according to figures from YouGov and 11 million of these individuals have mortgage debt outstanding and/or a family at home relying on them as the main breadwinner.
The conversation that afternoon demonstrated to me just how little consumer knowledge exists about income protection – and what public perception there is, is riddled with misconceptions.
So let’s take a look at a few of the myths and establish the facts.
MYTH: If you have sick pay through work, you don’t need income protection.
FACT: If you are one of the one million people in the UK that find themselves unable to work due to a serious illness or injury, chances are that you will qualify for Statutory Sick Pay (SSP). This is paid by your employer or up to 28 weeks. But, most people would find that the £94.25 per week would not go very far.
You cannot get less than the statutory amount, though you can get more if your company has a sick pay scheme (or ‘occupational scheme’) – check your employment contract – however, few of these schemes run for longer than 12 months.
You need to qualify for SSP and have been off work sick for 4 or more days in a row (including non-working days).
MYTH: Income protection is too expensive
FACT: Many consumers wrongly perceive income protection insurance to be too expensive – and not the case at all.
In fact, research by Royal London found that a gym membership is more than double the price of income protection.
Monthly gym membership fees in the UK are estimated to be £40.53. In comparison, a 30 year old, non-smoking male working as an administrative officer could get £18,000 income protection for full term with a 13-week deferred period for less than £20 a month
Admittedly, this type of cover is often more expensive than life or critical illness cover, but this is directly related to the increased risk of ill health meaning you are off work for an extended period, rather than suffering with a serious illness or dying during working life. But this means that you are more likely to need a payout.
The costs of your premiums will vary on your age, the policy and your current health.
The good news is that there are many ways to bring down the costs of premiums. Reducing the policy term to two years, for instance, is less than half the cost of full income protection, with premiums from Royal London as little as £10 a month.
Alternatively, shaping the amount of cover to protect specific debts or essential costs, or reducing the term of the policy to cover peak financial commitments, such as until end of your mortgage term or the education of your children, can make income protection premiums more affordable.
Myth: I am young, fit and healthy – I’ll worry about it when I’m older
Fact: None of us like to think about our own death or ill health – especially in our twenties and thirties. It feels like we are tempting fate simply for considering it. Plus, most of us like to live in a state of denial that anything like this will happen to us, so we stick our heads in the sand.
But the grim reality is that illness strikes consumers much younger than people think: figures from Primis show that the average age of a claimant is 49.
According to the insurer, there are around 293,600 new cancer diagnoses every year. More than 400 people in the UK suffer from a stroke daily, over 30,000 of us need heart surgery every year, and around 100,000 individuals in the UK are diagnosed with multiple sclerosis, a disease that also afflicts the young.
Research from Unum suggests that one in 10 of us is likely to need to take over six months off work due to ill health during our working life.
What’s more, we are three times more likely to go on long-term sick leave than we are to die during our working life.
The good news is that the younger that you take out the policy, the more affordable it will be.
MYTH: I have a pre-existing condition that means that I won’t be able to get an affordable income protection policy – or any at all, for that matter
Fact: If you have a pre-existing health conditions, obtaining cover may not be as straightforward as you’d hope – but it is not impossible.
This is when it makes sense to speak to a specialist protection adviser such as Cura, who are experts in obtaining policies for those with pre-existing medical conditions, a hazardous occupation, take part in dangerous sports or frequently travel abroad.
Remember that the last thing that insurers want to do is decline cover, so they look at how cover can be offered in each case. For instance, both Royal London and LV= say that where cover cannot be offered on standard terms, they will look at premium increases – and where the risk is too high to do this, will look at exclusions. Both say they regularly review the terms, so it is possible to reverse premium loadings and exclusions over time if conditions are well managed or do not recur.
Bear in mind that you take care to answer all the questions honestly and give the insurer the full facts to the best of your knowledge.
If you need to claim, the insurer might check your medical history and if they find something important that you didn’t tell them, they could refuse your claim.
It could be the difference between getting a pay out and getting nothing – so don’t be tempted to scrimp on the details.
MYTH: Due to childcare commitments, I only have a part-time job and don’t make enough money to insure
FACT: If you make more than you would get in state support – and this paltry amount would not cover your bills – then it makes financial sense to protect your income even if you are a part-time worker.
This is an issue that affects women especially as thanks to childcare affecting working hours.
Research from Scottish Widows found that many mothers are underestimating the financial value of their role within the household.
But even in a two-income family, the loss of either parent’s salary – no matter what the size – would have extremely serious implications. Parents depend on each other in all sorts of ways that go beyond earning an income and paying the bills. In many cases, the parent that stays in work would have to leave their full-time job to care for the kids if the other parent was unable to do so. Or if they choose to continue to work, the extra childcare needed would become very expensive.
It is important that you tell your income protection provider if your income has changed due to a change in contract, as the amount of benefit under plan needs to be adjusted to ensure you aren’t paying a higher premium than necessary.
MYTH: I am self-employed, so I don’t qualify for cover
FACT: According to LV= research, more than four in ten self-employed mistakenly believe they’re not eligible for income protection – and it affects more people than you’d think.
Figures from the Department for Work and Pensions found that 4.75m people, or 15% of the UK workforce, is self-employed and this number is growing.
Having this type of cover can be viewed as even more important if you are self-employed, as if you do face a lengthy absence due to sickness or an accident, you may only have the state benefits to fall back on.
Fortunately, there are a number of companies who will offer income protection to the self-employed.
Some providers allow you to cover between 50% and 70% of your profit before tax. LV=, for instance, covers up to 60% of net profit for the self-employed.
It is important to ensure that you cover a percentage of your profit rather than the revenue of your business, as this will avoid you over-insuring unnecessarily.
Many of these insurers acknowledge that income can fluctuate, so will consider the last few years of a client’s income when working out the maximum benefit payable at claim.
Some providers, such as LV=, offer specialist products like Personal Sick Pay that’s tailored to clients in riskier jobs who can be more expensive to insure, such as tradespeople, nurses, electricians and construction workers.
MYTH: Making a claim is too difficult, so not worth the cost of premiums
FACT: A serious injury or illness can be traumatic but you can be rest assured that you will have the support you need if the worst happen.
Data from the Association of British Insurers backs this up: insurers paid out on more than 87% of income protection claims last year,
So provided that you’ve kept up-to-date with your monthly premiums and have given truthful personal information when you took out the policy, claims are nearly always paid out.
This item can contribute towards your unstructured IDD CPD requirement.