It’s easy to assume that the best income protection insurance is the one that gives you the highest level of cover for the lowest premium. While both these factors are important, there are several other factors you should consider when comparing income protections policies:
All income protection policies have a waiting period, usually between 30 and 90 days. This means that for the first 30-90 days, you need to rely on your savings and leave entitlements. After the waiting period is over, the insurance benefit will kick in. If you recover before the waiting period is over, then you can’t claim your insurance.
Policies with shorter waiting periods are more expensive. While you may be tempted to buy the cheapest one with the longest waiting period, it’s important to consider how you will get by without an income for 90 days. Have you got enough saved or family that’s willing to support you for that long?
It’s also important that you read the fine print on this. Some insurers start the waiting period on the day you make the claim, while others backdate it to the day you stopped working due to illness.
Because income protection insurance is designed to be temporary, the insurer will only pay you a wage for a set period of time. Most offer benefit periods of 2 or 5 years. Some will pay you an income until you turn 65.
Generally speaking, the longer your benefit period is, the more expensive your premiums will be.
Types of premiums
As you age, your risk of developing health problems increases, making you more expensive to insure. Insurers factor this into their calculations and offer two main types of premiums: stepped and level.
Stepped premiums increase annually to cover the extra risk as you age. Some insurers implement the increase each year on your birthday, while others increase your premium on the anniversary of the day you took out the policy.
Level premiums don’t change annually. Instead, the insurer charges you a higher premium from the start but keeps it flat over the life of your policy. This means that in the early years, level premiums are more expensive than stepped premiums, but in the later years stepped premiums become more expensive.
Insurers sometimes offer add-ons to their income protection policies. Redundancy insurance is a classic example of this. Income protection only covers you if you can’t work for health reasons. It won’t cover redundancy unless you pay an extra premium for the redundancy insurance.