An income protection policy provides a tax-free income if you are ill and unable to work after a period known as the deferred period. The deferred period can be between 4 and 52 weeks and is selected according to the monthly premium and when normal income stops or is reduced, eg. when employer's sick pay ends.
This kind of policy protects a family from the major impact of illness where a return to work is prevented or a change of job is required. Full protection of your income is not given (typically only up to 50 or 65%) as the providers assume that, if larger percentages were given, there would be no incentive to return to work.
Income protection complements life assurance and critical illness cover, and protects against the possibility of not being able to provide an adequate income when too ill to continue normal employment.
What level of cover should I have?
There are many things to consider when deciding what level of cover is suitable for any family protection policy. A lot depends on the age of dependents, other investments, income and attitude to risk. Ultimately the family protection arranged is usually a compromise between the level of protection and affordability.
Can I be sure that the premiums will not increase?
Premiums can be either guaranteed or reviewable.
Guaranteed rate - the rate does not increase over the term of the policy. If rates should fall, however, premium payments could be stopped, the policy would lapse and a new one could then be taken out.
Care needs to be taken here to ensure that the provider accepts a new policy before the old policy is allowed to lapse and that the definitions of illness remain the same (or are still acceptable).
Reviewable rate - premiums can be changed at the discretion of the provider. This often means the premiums are lower at the outset and increase during the term of the policy, whenever the provider reviews the rates, typically annually or at longer intervals.
Because of the risk of very large premium rate increases, guaranteed rates are usually preferable.
© John Bramwell 2005
BV Services is Authorised and Regulated by the Financial Services Authority
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