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What is Income Protection Insurance?

Article by Simon Christopher
Article added: 29/6/2005 - Last updated: -
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Income Protection Insurance, also known as Permanent Health Insurance (PHI), is designed to pay a specified income should the insured person be unable to follow his or her occupation as a result of accident or illness.

Payout Limits
Income Protection Plans normally pay up to around 60% of the applicant's pre-disability income. The income payable from these plans is normally tax‚ free when taken out by an individual, rather than by an Employer on behalf of an Employee.

Policy Options
There are many options available when applying for Income Protection. It is important to select the right level of income benefit at outset. It obviously makes sense to check with the insurer what their maximum level of benefit is for your current level of earned income. There is little point in selecting a higher level of benefit than would be paid in the event of a claim.

Most Income Protection Plans include a waiting period before a claim is paid should you be unable to work. The waiting or deferred period ranges from 7 days to 12 months. The majority of insurers have a minimum waiting period of 4 weeks before the benefit is payable.

The longer waiting periods may be suitable for employees who would continue to receive an income from their employer if they were unable to work. Generally self employed individuals may find it necessary to select the shorter waiting periods but of course this will depend upon how long and at what level their income would continue in the event they need to claim. The longer the waiting period selected the lower the premium is likely to be.

Your Occupation
The type of occupation is extremely relevant to income protection applications. Manual occupations or occupations of a hazardous nature are likely to attract the highest premiums. Professional, Supervisory and Administrative occupations generally enjoy lower premiums levels.

Definitions of Disability
There are normally three definitions of disability relevant to income protection plans. These are:-

1. Inability to follow your own occupation
This is the most favourable definition and is generally only offered to those with low risk occupations.

2. Inability to follow any occupation to which you may be suited by way of training or experience
This is not as good as the previous definition because although perhaps you could not continue as a Brain Surgeon following an injury to your hands you may have the training and experience to become a GP for example.

3.Inability to follow any occupation
This definition really means that you have to be totally physically or mentally incapacitated so that it is unlikely that you will ever be able to follow any occupation whatsoever. This is the most likely definition to be offered to those in high risk occupations.

Increasing Benefits
At outset you can select whether you wish the benefit to increase annually in line with various indices such as Retail Prices Index or Average Earnings Index. This usually means that the amount of cover will increase every year (together with a similar increase in the premium) by the factor selected on the application. In addition this usually means that the benefit will increase annually in the event of a claim.

Proportionate Benefit
This is a valuable feature of some Income Protection Plans. This effectively provides a 'top-up' if, after a claim, you return to work but can only follow a lower paid occupation. Proportionate Benefit will provide the difference between your current income and your pre-disability income.

Protecting your Mortgage
Although Income Protection Plans are best used to protect your total earned income they are increasingly used to protect Mortgage and other associated payments should you be unable to work through illness or disability.

This can be attractive particularly as income payments will continue until either you make a recovery or until the plan reaches the end of its term. This compares to a maximum payment period of around two years offered by Accident, Sickness and Unemployment Plans. The disadvantage of Income Protection over ASU Plans is that the Income Protection Plan will not pay out on Unemployment.

PLEASE NOTE: The guidance published in this article is for information only and does not constitute financial advice or a recommendation of any particular product or company. If you are in any doubt please consult an independent insurance adviser. A database of advisers in your area is available at

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