Every year, hundreds of thousands of individuals are unable to work because of illness or injury, and while no one likes to think about these kinds of things happening to them, it is possible to protect yourself and your income.
If something were to happen to you that meant you could no longer earn a living or you were made redundant, would you and your family be able to survive on sick pay or savings? If not, you might need to consider some protection such as loss of income insurance in order to cover yourself and your family.
Loss of income insurance is also commonly referred to as income protection insurance and is designed to help you if you can no longer earn a living. This guide explains what loss of income insurance is, who can benefit from it, and some top tips to help you decide which option is best for you.
What is loss of income insurance?
Loss of income insurance or income protection insurance is a type of long-term insurance policy to help you if you are unable to work and earn a living because of illness or injury. It will provide you with a regular income until either you are able to return to work or reach retirement age.
Some policies will have a fixed term so will only pay out until the end of this period, whereas others last for the duration of your life.
The monthly payments are designed to replace your usual income, and they are often based on how much you earn or how large your monthly expenses are. Most loss of income insurance policies will have a waiting period before the payments will begin, and this is generally until your sick pay ends or a fixed period such as three months.
When you have loss of income insurance, you will be covered against specific illnesses that will be defined in your policy. Most illnesses that leave you unable to work and earn a living will be covered, but it is always good to check exactly what you are covered for before you take out a policy.
Depending on the type of policy you take out, you are likely to be able to claim as many times as you have to while the policy lasts. Income protection insurance is not the same as critical illness insurance, which works similarly to life insurance and pays out a one-off lump sum if you are diagnosed with a specific illness.
There are many different options for loss of income insurance, and it is vital that you get a policy that is right for you and your situation. It is often worth seeking independent financial advice before taking out loss of income insurance.
Who can benefit from loss of income insurance?
Anyone can fall ill or be injured in an accident that means they can no longer work and earn a living. Loss of income insurance could be worthwhile for anyone who would struggle to pay their bills if they were no longer working for any reason.
It is not only a good idea for those with children or other dependants, as anyone who cannot pay their bills should consider taking out a policy. You are most likely to need loss of income insurance if you are employed but don’t have sick pay to rely on or are self-employed.
Some individuals may not need loss of income insurance as they may have other options such as:
- Sick Pay: If you have an employee benefits package which includes sick pay that you could get by on.
- Government Benefits: Help from the government is often not enough to cover all your outgoing and expenses, but if you could get by on this then you may not need additional insurance.
- Savings: If you have enough savings to support yourself should you no longer be earning. Bear in mind that these savings might have to support you for a long time.
- Early Retirement: If you are not too far from retirement age then you might be able to afford to retire early should you end up in a position where you can no longer work.
- Family Support: If your family or partner have a high enough income to support you and cover all your outgoings.
The cost of loss of income protection will vary depending on the policy and your individual situation. Your monthly payments will be based on your age, job, income, waiting period, and current health.