Newsletter 4
Case Study # 2 - Protecting your income - Accident, Sickness & Redundancy Vs Income Protection
Protecting your income in the event of illness can be even more crucial during periods where finances are stretched. Having appropriate protection to replace your income in the event of illness or redundancy gives you peace of mind that your outgoings are covered if you are unable to work for a prolonged period.
Whilst we realise this may not be at the top of your list of priorities at the moment it is no less important today than it was last year. This case study looks at the 2 main types of policy you can use to protect your income.
Income Protection Cover is a long term policy that provides cover for health related work absence and NOT redundancy. In the event of such absence, you will receive a tax-free monthly income that will be payable until your desired retirement age. Income Protection Policies (IPP) can be claimed on multiple times (even for the same illness/disability) and if you return to work at a lower salary following incapacity, you can claim a proportional amount of the policy.
Income Protection Policies are not linked to mortgage payments and the benefits are paid as tax-free general income, which can then be used for mortgage/loan payments, food, bills, etc. The maximum monthly benefit for an Income Protection Plan is generally 50% of your gross salary, however if you receive full sick pay from your employer, then you will not be able to claim on the policy until all of you sick pay has been used; proportional amounts may be paid if you only receive half or quarter sick pay. Indexation can also be built into the policy to ‘inflation-proof’ your benefits.
Income Protection Premiums are calculated based on your age, occupation, health, amount/level of cover and your selected retirement age/deferment period. When applying for Income Protection Cover, there is a much stricter underwriting procedure to go through than with ASU. This means that upon application, they will ask more personal and medical questions, they may contact your doctors prior to setting up the policy and for the larger cases may request you to attend a small medical screening. The main advantage of this is that you know that full disclosure is being made by your GP and therefore the chances of a claim being turned down are minimal. Due to this, it may take to longer to set up an Income Protection Policy than an ASU Policy.
Accident, Sickness and Unemployment (ASU or ASR - Redundancy) Policies provide cover for a shorter term than Income Protection Cover and therefore can only be claimed for a maximum of 1-2 years, depending upon the provider. ASU Policies can have redundancy cover incorporated for employed persons only, meaning that you can claim on the policy should you be made redundant from your occupation. ASU policies are generally linked directly to your mortgage or loan payments. The maximum benefit for Accident, Sickness and Unemployment Policies is £3,000 per month. However, this benefit can be claimed on top of sick pay from your employer in the event of an Accident or Sickness.
ij Points of note
ASU can be more suitable for older applicants and those in higher risk occupations as the cost of IPP may be prohibitive.
Unlike ASU policies, IPP is thoroughly underwritten prior to starting, whereas ASU policies operate on a moratorium basis, excluding pre-existing conditions.
If you are aware of confirmed redundancy, you are unlikely to be able to claim on an ASU policy as the policy must be in force for at least one month prior to claim.
Please do Contact Us to obtain further information and / or a personal illustration.