How to get the most from income protection

Income protection insurance pays you an income if you’re unable to work. It offers reassurance you would potentially be covered for any income shortfall if you’re unable to work due to illness. Our ‘Do you need income protection?’ article can help you decide whether this type of insurance is right for you.

Income protection policies contain a wide range of features and options. So it can be hard to work out which particular policy or particular policy options meet your requirements.

In order to try to keep things as simple as possible, we outline what policy features and options you need to get the most out of your income protection cover. Greater levels of cover generally require you to pay higher premiums. If, on the basis of cost, you decide you don’t want to pay for maximum cover, then at least you’ll know what you’re missing.

Income cover

Income protection policies pay out a proportion of your pre-tax income. For maximum protection, in the form of the highest amount of financial cover, choose a policy that pays the highest proportion of your pre-tax income.

You should be aware, though, that any other income sources you might have would be taken into account by the insurer when you come to make a claim. If you have other income sources then, by opting for the highest proportion of your income, you might pay for cover you won’t be able to claim for in full.

Higher earners should also be aware of any maximum income limits on the policy, which usually cover up to £20,000 a month.

Levels of cover

Income protection policies offer different levels of cover. For maximum cover, choose the ‘own occupation’ level of protection. This pays out if you’re unable to perform your own occupation rather than any suitable occupation or any occupation whatsoever. Opting for lower levels of cover could mean you have to work in an occupation you don’t enjoy.

Exclusions

For maximum protection choose a policy that covers medical conditions you’ve already had (‘pre-existing’ medical conditions), if that’s possible, and conditions other family members have had. Some policies exclude these conditions following a review of your health and lifestyle.

Insurance premiums and inflation

For maximum cover, choose an ‘index-linked’ policy whose payouts go up as inflation rises. Inflation measures the rise in the cost of living and, as it goes up, our income needs increase along with it. The payouts from index-linked policies are matched to well-known indexes of inflation such as the retail prices index (RPI).

Policy term

Finally, for maximum cover, you would need to ensure the term of the policy runs until your retirement age. Whether you’d need it to do so would depend on your individual circumstances. You might, for example, just want an income protection policy to cover you for the period of your mortgage, which could end before your retirement age.

In addition, you may also want to consider ensuring the policy you take out has the following features:

• The payouts for an inflation-linked policy would increase with inflation both when the policy is in force and while claiming.

• You would get an immediate payment in full if you get a relapse of an illness within six months.

• You wouldn’t need to notify the insurer of a change of your occupation.

This article shows what you need if you want to get the most from your cover from an income protection policy. It doesn’t consider the associated cost of premiums, which are generally higher for higher levels of cover.

Further considerations

There are other factors you may want to consider when choosing income protection cover. We go into these in more depth in our article on how to choose an income protection policy, but I cover a couple of points here.

First, most policies have a ‘waiting period’ of at least a month after you stop work before payments start. For maximum cover, you’d want as short a waiting (or ‘deferred’) period as possible. But if you have sufficient financial resources, then you might not need a short waiting period and you could reduce your premium payments by opting for a longer one.

Second, if your employer will pay you for a particular spell of time, then you may benefit from a policy offering two different payment levels for two different periods.

Trying to work your way through the variety of income protection policies to find which might be right for you can be challenging. You may find it easiest to get in touch with a financial adviser who can help select a policy that matches your protection needs.