Opinion & Analysis
Kara Gammell: HOW IP and CI complement each other
29 Oct 2019
By Kara Gammell
How long would your savings last if you became unwell and could no longer work for an extended period of time?
The average working adult has enough savings to last just 32 days on their current lifestyle should their income stop, according to research from Legal & General. Does this sound like you?
Perhaps you’ve never thought about it – and who can blame you? No one likes to think about getting terribly sick.
Though sadly, it is more common than you might think. Figures from Unum show 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. So, how would you foot the bill without an income?
Many of us wrongly assume that should we fall ill, we could rely on sick pay to see us through. Sure, you will qualify for 28-week’s worth of Statutory Sick Pay (SSP) – currently £92.05 a week. Then there is government support, but that doesn’t go very far: you’d only be entitled to a maximum of just £145 a week in Personal Independence Payment benefits should you be signed off work long term.
Would that be enough to keep a roof over your head and food on your table? I doubt it.
However few of us have taken out adequate insurance to protect our salaries should we be unable to go out and earn it. Figures from Zurich show that just one in ten of us have income protection, a type of policy that helps to pay vital bills in the event of prolonged periods of poor health where you can’t work. The amount of people with critical illness cover (which pays out a tax-free lump sum in the event of a diagnosis) is a higher, yet according to the Financial Conduct Authority, 65% of the UK adult population does not have any form of protection insurance in place at all.
Yet, by contrast 71% of people insure our homes, 70% insure our holiday and 18% our mobile phone.
But, there is no need to panic – it is possible to protect yourself without breaking the bank. If you assumed that this type of cover would be too expensive, you aren’t the only one. The good news? That’s 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 – and how many of us are actually getting our money’s worth once January and our New Year’s Resolution has come and gone?
Monthly gym membership fees in the UK are estimated to be £40.53. In comparison, according to brokers Lifesearch, 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. Bear in mind that the costs of your premiums will vary on your age, the policy and your current health.
COVER ALL YOUR BASES
In an ideal world, you would also take out a critical illness policy too as the benefits complement each other as they represent different risks.
CI typically provides a lump sum in the event of a potentially life threatening illness while IP pays income if you cannot work until you either can work or retire. In other words, one pays off the debts while the other pays the ongoing bills.
The wad of cash you get as a lump sum with critical illness cover can be quite alluring, but the amount you might get from an income protection pay out can often far surpass this in the long run – so it is crucial to do the sums.
Income protection allows for a claim to be made for any health factor that causes incapacity; policyholders are not restricted to the set list of illnesses as with critical illness.
The cover that you need will very much depend on your individual financial circumstances – and it’s not a case of ‘either or’ when it comes to income protection and critical illness cover, thanks to the significant difference between the two products.
“There’s a place for both – and for each to be tailored to suit their individual needs and their budget,” said Justin Harper, head of protection marketing at LV=.
“IP protects the client’s most important asset – themselves and their earning (and spending) power and is their income safety net and back to work plan while critical illness can provide a cash lump sum boost, in the event of a life changing illness/condition,” explains Harper.
Income Protection, which covers accident and sickness is an insurance that replaces lost income while you’re off work sick and is described by Which? as the one protection policy every working adult in the UK should consider – and the very one most of us don’t have.
The illness or injury that keeps you from working could be anything; as long as it keeps you from doing your job role, you should be able to claim.
After a chosen ‘waiting period’, known as the deferred period, the policy kicks in to pay out a regular, tax-free monthly income.
This allows you to keep up with essential living expenses and focus on your recovery rather than worrying about where the cash will come from to pay your next set of bills.
The best Income Protection pays out long-term, so if you’re so ill or injured you can never work again you’ll receive a monthly income all the way up until retirement.
On such long-term policies, it’s possible to claim as many times as you need to for as long as you need to over the life of the policy, right up until the age you’ve chosen for your policy to end.
While critical Illness Insurance pays out a tax-free lump sum if you’re diagnosed as critically ill.
You must be critically ill as per the insurer’s list of definitions of serious illnesses in their policy terms and conditions to make a successful claim.
This means the number of conditions is limited by design and the illness or injury keeping you from working needs to be ‘critical’ if you’re to receive a payout.
The biggest three claims on these policies are for: cancers, heart attacks and strokes.
There’s no deferral period during which you must wait before you can receive a payout; a claim can be made as soon as you have diagnosis of your critical illness.
It’s worth noting that figures from Drewberry show that nearly half of income protection claims are made up of musculoskeletal issues and back pain, with a further 7% made up of mental health problems.
Yet none of these are deemed ‘critical’ as defined by a Critical Illness Insurance provider, though can be nonetheless debilitating and clearly result in many successful Income Protection claims each year.
The policy is not tied to your earnings and you can insure however much you like. In this respect, it is similar to life insurance except that the plan pays out based on illness or injury rather than death.
EXTRAS MAKE A DIFFERENCE
While the financial benefits are usually the main reason why you should choose to protect your income, many policies frequently come with a wide range of added value support – and doesn’t cost a penny extra.
“Financial pay outs help families make ends meet so people can focus on their treatment and recovery, but it’s only one of the benefits to having a critical illness policy,” said Simon Jacobs, head of underwriting and claims strategy at Aegon UK.
“There’s also the need for practical and emotional support, which can often be the more immediate priority. Financial support will help to some degree but the best protection policies provide both a financial and emotional crutch.”
Jacobs points out that Aegon customers have access to Policy Plus, which includes a health and wellbeing service, throughout the lifetime of their policy.
“There’s a wide range of support available 24/7, 365 days a year, with trained counsellors offering help and support with concerns about health, work-related stress or even family issues such as marital differences or children’s behaviour,” he said.
There’s no denying that this can be a huge weight off someone’s shoulders to be able to share any anxieties they might be feeling following a diagnosis or during treatment.
“Sometimes people just don’t feel comfortable speaking to close family and friends for fear of burdening or worrying them,” he said.
While Royal London protection products come with its Helping Hand service that provides practical and emotional support from the start of your plan and can be used even without a claim.
“We believe that insurance should provide more than just a cheque and are keen for customers to understand the full benefits of the cover in addition to financial,” said Jennifer Gilchrist, protection specialist at Royal London.
The insurer’s critical illness policies also provide child cover too and this can be added at the beginning or at a later date depending on a customer’s circumstances.
“The child critical illness cover is specifically tailored to support specific child illnesses from birth and also comes with funeral cover while pregnancy cover is included covering any complications before birth,” said Gilchrist.
“Under income protection additional benefits include hospitalisation cover if there is a hospital stay and fracture cover if you were to break a bone.”
Convenient medical support can be a major challenge for workers and our families, so it is always worth looking into these additional benefits to get the most out of any protection policy.
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