Protect your income

Wednesday 20 April 2016, 12:00 PM

Ricky Butler
Head of Best Practice , LifeSearch

  • Umbrella cash lg

Which? argues that the one protection policy every working adult in the UK should consider is the very one most of us don't have - income protection.  Let's get one thing clear - income protection isn't the same as the widely mis-sold payment protection insurance (PPI).

Where as PPI covers a debt and payouts go to your lender, income protection gives you a tax-free percentage of your income if you're unable to work due to injury or illness.  Income protection is often overlooked because of cost but there are lots of things you can do to bring the overall premium down. Here are 5 ways you can do that.  

Start with your essentials

When looking at how much your plan should pay out its important you work out how much you need to run your household.  Many people try to insure the whole of their income however income protection payouts are normally based on a percentage of your earnings: 50 – 70% being the range.  If you over-insure yourself the extra cover will increase your monthly spend.  Work out what your essential monthly expenditure is like; your rent, mortgage, bills and food removing any discretionary spend.  

Wait for your money a bit longer

The deferment period is the time before the policy will pay out. If you increase the deferred period the insurance premiums become cheaper.  The temptation is that you will want your plan to payout as quickly as possible but changing it from 1 month deferred period to 3 months will cut your cost.  The best course of action is to have the deferment period kick in after the sick pay from your employer ends or if self employed, any savings you can rely on run out.  

Consider a budget plan

Full income protection plans pay out right until the end of the plan or you go back to work after an illness.  You can reduce your costs by taking on a plan with a limited payout period which is known as a budget income protection plan.  This would mean benefit would payout for a limited number of years.  Careful consideration needs to be given to the fact that if you are still sick after the limited payout ends then insuring yourself after this time could be problematic and you would normally expect an exclusion on any pre-existing conditions.  

Think about the term of your plan


Running an income protection plan to retirement - 65 or 70 - will cost more than choosing a set term.  If you are concerned about protecting your income while you have debt or insuring yourself while people are dependent on you, the shorter the term the lower your monthly premium will be.  There is no point running the plan as long as possible if you wont require it after a certain time.    

Start early don’t put it off

When you take on an income protection plan at a younger age you may end up paying premiums for a greater number of years but you will still normally pay less overall.  The older you are when you take on income protection the higher the premiums.