Income Protection
What is Income Protection Insurance?
Income Protection is a term which describes any insurance which can provide an income to meet your ongoing commitments or specific debts like your mortgage or personal loans.
- Permanent Health Insurance (PHI) replaces a proportion of your income if you are unable to work due to accident or illness. You can use the monthly payments for any purpose. The maximum cover is usually around 60% of your income because payments are made tax free. Payments are made until you return to work or until retirement age.
- Mortgage Payment Protection Insurance (MPPI) is designed to meet your monthly mortgage payments if can't work due to accident, sickness or unemployment. Payments are usually made for a specified period such as one or two years.
- Payment Protection Insurance (PPI) is similar to MPPI but is used for personal loans or credit card payments. Like MPPI, payments are usually made for a specified period.
Who is it suitable for?
Pretty much anyone who has got regular commitments which they need to meet. Most of these still apply whether or not you are in work.
- A PHI policy which is set up correctly should be able to meet most of your commitments.
- You should consider how you would meet your regular payments on your mortgage and personal loans if you were unable to work. If you wouldn't be able to meet these, PPI or MPPI may be suitable for you.
What should you look
out for?
These income protection policies work in different ways, so
there will be different things to be aware of depending on the type of policy.
- PHI policies have a ‘deferment period' which is a period of time between you not being able to work, and when the payments from the policy start. You can choose the length of this period, usually between 6 weeks and 6 months. The longer the deferment period, the cheaper the premiums will be. Make sure this period ties in with any length of time you get paid by your employer. If you're self employed you will probably need the minimum deferment period.
- PHI policies can be set up on an ‘own occupation' or ‘any occupation' basis. Own occupation will pay out as long as you cannot work in your current job. With an ‘any' occupation policy, if the insurer thinks you're fit enough to return to work doing something else, they may reduce or stop your payments.
- PPI sales have had a lot of criticism in recent months because the policies have been sold to people who weren't eligible to claim on them or because of the perception of them being poor value.
- In most cases PPI for credit cards will only meet the minimum monthly repayment so you won't get a charge for late payment. So if you're used to paying off the whole balance each month, you'll end up with an interest charge for the rest of the outstanding amount.
- PPI is optional and you should shop around if you intend to take this insurance out. The policy your lender offers you might not be the best value, or the best quality of cover.
- Most PPI policies related to personal loans which are bought from the lender are paid for by a lump sum premium which is added to your loan. So you pay interest on the premium and may not get a full refund of the premium if you repay early. If you have to get this type of policy, make sure it allows for a ‘pro-rata' refund so you only pay for the cover you have. Better still, buy it separately so you don't have to pay interest on the premium.
- Don't buy the PPI the lender offers you. It can be a valuable insurance to have, so go to an independent broker who can get you a better product which is suitable for your needs.
What to do next?
Take a look at our guides on Things to Watch Out For,
and Key Factors to Consider when buying insurance, so you can go in
knowing what you're looking for.
Moneyfacts.co.uk has also put together a range of insurance
guides if you are looking around for other types of insurance.
Take a look at Moneyfacts' Income Protection service.
We'll put you in touch with an authorised adviser who will be able to give you
a quote and arrange the insurance for you.
