Protecting your family and household income against some of life’s financial disasters is important. But working out which type of insurance you need can be confusing.
Life insurance, income protection and critical illness cover all provide a financial safety net, but they protect against very different risks. Some policies pay out if you die, while others can provide an income if you are unable to work, or a lump sum if you’re diagnosed with a serious illness.
Any policy will need to be taken out before issues are present, so how to choose? The best option for you will probably depend on whether you have a mortgage, children or other dependants, and how much income you could afford to lose if you were unable to work.
We’ve spoken to insurance and protection experts to explain the key differences and help you make the best decision.
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Income protection insurance can replace part of your salary, typically around 50pc to 60pc, if you are unable to work because of illness or an accident.
Depending on the policy, payments can continue until either you are able to return to work, reach the end of the payment period or the policy term ends. Short-term policies usually last between 12 and 24 months, while longer-term policies might pay out until you retire. In general, these longer-term policies will be more expensive.
There’s also usually a “deferred period”, which means you won’t receive payments until this period has passed. This waiting period might be four, eight, 13, 26 or 52 weeks, with longer waiting periods typically resulting in lower premiums. You will, however, need to have other ways to fund the lost income over the deferred period.
Income protection insurance is worth considering if you’d struggle to pay the mortgage and household bills if you couldn’t work, particularly if you don’t have substantial savings to tide you over. Although many employees receive sick pay from their employer, this usually only lasts for a limited period.
Rob Saunders, of insurance broker Howden, said: “This type of policy can be particularly valuable for self-employed people or those whose occupation has a higher risk of injury or illness, which could impact the ability to earn.”
However, you’ll need to weigh these benefits against the cost of your policy. Premiums will depend on factors such as your age, health, your occupation, and the level of cover you choose. Other considerations include the workplace benefits available to you.
