Income Protection Insurance

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  • What is Income Protection Insurance?
  • Why do you need Income Protection Insurance?
  • What type of Income Protection policy, and amount, should you get?

As a mortgage adviser we work on a core principle – working with you until you are mortgage free.

In an ideal scenario that will simply mean we help you obtain the right mortgage and help manage that down over time until you’re mortgage free.

As an absolute minimum we want people to be in better shape after dealing with us than before.

Unfortunately, life gets in the way and unexpected things do happen.

So that’s why we think it is critically important that we don’t just saddle you with a very large debt but also protect you, to ensure you do end up mortgage free and are not financially disadvantaged along that journey.

What is Income Protection Insurance?

  • If you are unable to work, through illness or injury, an Income Protection policy will pay a replacement income for a set period.
  • This is the broadest type of protection cover which is why we most often recommend it to our clients, as this covers most eventualities.
  • Provided a doctor has signed you off as unable to work, for most issues, then Income Protection will pay out.
  • This covers major medical conditions such as heart attack, cancer, stroke and all the illnesses that a critical illness policy typically pays out for. It also covers musculoskeletal conditions and major injuries.
  • Plus, this is also the only type of cover that looks after mental health issues also. If you are going through a rough period, maybe anxiety or depression, and a doctor says you can’t do your job then this insurance will replace provide a replacement income until you return to work.
  • That is why Income Protection Insurance is such a good thing to have available.

How does an Income Protection policy work?

Income Protection Insurance is linked to your level of your income. Most providers offer around 50% to 60% of your gross annual salary when making a claim.

The reason this percentage is not higher relates to two factors.

  • Firstly, you don’t have to factor in taxes. No tax is to be paid on these payments.
  • Secondly, claiming on this type of policy shouldn’t put you in a better financial position than prior to the claim. There’d be no incentive to get back to work if this were the case.

What you often find is that around 50% of your gross pay is normally about 75% of your net pay depending on how much you earn. This is normally sufficient to cover major bills.

Why do you need an Income Protection policy?

  • Put simply, no income no life.
  • Money gives you options and no money equals no options. But we would never want that for any of our clients.
  • If you do have this cover already, or if you get it through work, you don’t need it. But if you’re like most of the UK that don’t, then you really do need it.

What would happen if your income ceases?

  • Let’s just think about this for a moment.
  • Let’s imagine your situation where you have a serious illness or injury, and your income stops.
    • How long does your employer continue to pay you?
    • Now how long until you burn through your savings?
    • After that point. what direct debits do you stop paying? Does the car go back? Do you have to move? Do you have to take the kids out of school?
  • It doesn’t take very long before you must make some very big, awful decisions, and remember this is in the context of you being so sick that you can’t work.
  • Do you really want that financial pressure on top of everything else?
  • We would never want you to be in this position. That is why we talk about this with you. If we didn’t have this conversation with you probably no one else will.
  • It doesn’t have to be that way. By doing something relatively simple at a very modest cost means you don’t have to go through this thought process.

Additional Income Protection benefits

  • There are also a range of Income Protection benefits which insurers provide. They have a vested interest in helping you get back to work. You can think about this is in two ways. Of course, they want to stop paying the claim and there’s truth in that, or you could see it as a good thing that they offer lots of rehab and recovery services to get you back on my feet.
  • Because surely that’s what you’d want to happen if you had a major illness or accident? You would want to recover as soon as possible with an insurer that has your best interests at heart. Your interests are aligned with the insurer’s and that’s positive. The alternative is you’re out on your own.

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Our key aims are to fully understand what you are looking to achieve, create a solution tailored to your needs, deliver results through an excellent service and build a relationship for life.

What type of Income Protection cover, and amount should you get?

Income Protection Insurance is probably the most complex type of protection product you’ll ever consider, which highlights why you need individual advice tailored to your specific circumstances, so you choose the best income protection insurance for you.

How much Income Protection Insurance?

  • The first thing you need to do is identify how much cover you need.
  • When you’re completing a mortgage application this is straightforward. We know what the mortgage payments are going to be, and we know what your fixed outgoings are likely to be. So, it’s easy for us to ascertain how much cover you need.

How long do you need cover for and when should it start?

You need to consider how long you need an Income Protection policy for. There are two aspects to this.

  • Do you want to simply cover the mortgage term?
  • Or do you want cover until your retirement date if that’s different? Even after the mortgage has ended you obviously still need income to pay bills and eat.

Some insurers do offer time limited payments, so for example they just pay out for two years rather than the whole mortgage term which keeps cost down.

When should your cover start?

  • How long do you have to wait before payments commence?
  • The technical term for this is the deferred period.
  • For example, something happens, you become ill or have an accident and your doctor signs you off as too ill to work. Day 1 is once you get that doctor’s note.
  • Now how long do you have to wait after that until your Income Protection cover pays out and you receive income protection benefits?
  • Does your employer pay out for one month, three months, six months, or nothing at all? Do you have any savings? Do have you any assets you would want to use?
  • This will determine how long you need to wait until the cover commences. The simple relationship is the longer you wait the lower the cost and the greater amount of your own resources you are calling upon.

Should you index the cover?

In broad terms things are more expensive in the future than they are today. There’s a very strong argument for linking Income Protection cover to either inflation or a set amount each year each typically 2% to 5%.

For example

  • Let’s say you cover £3,000 today. That won’t equate to £3,000 in 10 years’ time. That monetary value won’t cover as much of your expenses in the future as it does today, and you can cover against this eventuality.

Our role is an adviser will simply be to go through the Income Protection benefits options and identify if it’s relevant to you. We advise you on the best income protection insurance for your circumstances.

Please do get in contact and we will give you personalised advice to make sure we get the best outcome for you.