A Guide to Income Protection (IP) Insurance13th May 2016
Insurance has hit the news this year with the compulsory roll-out of medical insurance in Dubai set to achieve 100% coverage by July.
An appetite for insurance in general has been whetted. UK expats want to find out how other insurance products could help them,but there’s so much to choose from! In many insurance sectors, there are simply too many products on offer to grasp them all in their various combinations. It’s enough to make you think it can’t be worth the hassle if it can’t even be explained clearly.
Here at Holborn Assets we are hearing complaints that, when it comes to the sector of Income Protection (IP) Insurance in particular, it is hard to see the wood for the trees. There is an overwhelming choice of IP Insurance products that are similar – but subtly different.
Let’s look at similarities: what’s the general idea of these IP Insurance products?
So what is Income Protection (IP) Insurance?
IP Insurance protects you in some way against a future inability to earn money, whether through accident/sickness/unemployment. IP Insurance is available from local and international providers in such variety that packages can be crafted by a broker to suit a customer’s personal financial scenario perfectly. So that’s the good news.
The bad news is that IP Insurance remains confusing. Income Protection (IP) Insurance is not, for example, the same as Intellectual Property (‘IP’) Insurance – which relates mainly to Patents and has nothing to do with personal finance.
So if even the name of this insurance is misleading, where do you start?
Well let’s start with you. What can Income Protection (IP) Insurance offer you, the UK expat?
What can IP Insurance offer the UK expat?
If you find you suddenly cannot work in the future – for whatever reason – IP Insurance gives you something you can do right now to prepare for that financially.
That means you can effectively buy peace of mind. Like any other form of insurance, the bottom line of IP Insurance is in hardwiring certainty into the personal finance projections of the customer; laying down some stones in the sand as it were measures that can be counted on in the shifting landscape of the financial future. The management of uncertainty is what you are paying for, ensuring that, as Kenneth de Zilwa, General Manager of Holborn Assets – Sri Lankan puts it, “the ups and downs of life are adequately addressed.”
Can I not just save up to protect my future income?
‘Self-insuring’ makes sense. Why not simply put enough cash away as you go along so that, if the worst does happen and you cannot work, you have something to fall back on? That’s what savings are for – right?
Well, yes and no. Saving is always a good idea. Nobody needs to tell that to the canny expat working in Dubai!
But, if you’re going it alone, you’re really going to have do some sums – and they might not add up. Heed the warning of UK personal finance site gocompare.com that, “while everybody needs a rainy-day savings fund, you should be aware that you may need a very significant sum to match the sort of pay-outs that can be offered by policies like life insurance, critical illness cover and income protection.”
Exactly how ‘very significant’ your savings need to be to match the payback of an insurance product is something only you and your broker can determine from face-time analysis of your unique financial profile.
So what type of IP Insurance is going to suit me?
There are differing opinions in the comparison industry as to how the whole gamut of IP Insurance products fits together.
Certainly one way of really getting to grips with what’s on offer is to classify IP Insurance products by the length of time they pay out for:
Short-term products – often known as ASUs (Accident/Sickness/Unemployment), cover a temporary inability to work and earn; paying out for a few years at most.
Long-term products – pay out indefinitely (until death) in the event of a permanent inability to work; usually do not cover unemployment.
Short-term products are called ASUs because the trigger for pay-out always involves at least one of the three calamities of Accident, Sickness or Unemployment – often in combination (as with Accident/Sickness cover) or singly (as with Unemployment Only cover).
As for what future outgoings you can protect with an insured income, there are two main types:
- Specific payment protection – where a specific outgoing is protected; as in Mortgage Payment Protection Insurance or Payment Protection Insurance. Pay-outs are made to you; you are then free to decide whether or not to service the specific payment you have set up the scheme to protect.
- General payment protection – where general lifestyle outgoings are protected.
ASUs are characterised by a fixed ‘benefit term’. This means that benefit payments will only be made for a few years at most, according to what you and your insurer (or broker) have agreed.
You can tell a long-term IP product from a short-term IP product by its unfixed benefit term. With a short-term product, the benefit term is fixed, finite. iWth a long-term IP product however, payments will usually be paid indefinitely.
Long-term IP payments will be made in the event of partial/permanent inability to work through accident or sickness. Unemployment through redundancy is usually not covered.
The cost of long-term IP Insurance depends on how flexible in your work you are prepared to be in the future.
If calamity prevents you from doing your own job and you could do many other jobs but do not want to – then that ability to pick and choose is going to be expensive. UK financial comparison site moneysupermarket.com confirms that, “the best policies are those which pay out if you can’t do your own job, but premiums are more expensive.”
At the other end of the scale, if you become incapable of doing any job at all – and therefore have no choice whatsoever in what you do because you cannot do anything – then insurance is cheaper. Some consolation, that!
Insurance is not – and never has been – a free lunch. You get what you pay for. And in the case of long-term IP Insurance, insurers will commonly offer one of three choices:
- Own occupation (most expensive)
If you cannot do your own job in the future, this policy will pay out. This is the most expensive cover since it protects you from a potential inability to perform in a specific occupation.
- Suited occupation
If you cannot do your own job in the future or a similar job that matches your professional profile, this policy will pay out. This means that simply not being able to perform in your own ‘specific’ occupation will not be considered as grounds for a claim. You will need to prove that you cannot work in any other related job that matches your qualifications and experience.
- Any occupation (cheapest)
If you cannot do any job in the future, this policy will pay out. This is the cheapest cover since you can only claim if you’re unable to work at all.
What features do all types of Income Protection Insurance share?
With the two types of Income Protection Insurance, the clue is in the name when it comes the difference between them – long-term vs. short-term. But what do short- and long-term policies have in common?
- A potentially nasty surprise …
- … In the form of a compulsory waiting period between you making a claim and you getting a pay-out. This should not be a surprise to you when it comes, since this ‘deferred period’ is always negotiated as part of getting a policy together in the first place.
- But with this ‘deferred period’, how long how are we talking about? Well, the time it takes you to get your money “can range from one day to as long as 104 weeks” according to com, with gocompare.com observing that the deferred period is “usually between four and 52 weeks”. For short-term IP products, mentions moneyadviceservice.org.uk, the waiting period is usually 30-days.
- The only things you can nail down about this are, firstly, that you will definitely have the chance to discuss the deferred period when you are setting up your insurance policy and, secondly, that the longer the deferred period you are prepared to tolerate, the lesser your overall premiums will be. Make sure this discussion happens.
- A predictable link between your wallet and the insurer’s meter
- Across all IP Insurance products, com confirms that “the longer you want a policy to have the provision to pay out for (the ‘benefit term’), the more the premium is likely to cost.”
- A high age limit
- Insurers will cover you up to retirement age. Retirement age is generally agreed in the sector to be 70 years.
6 Tips to ace Income Protection Insurance
- Stop smoking – any smoking
- Infuriating for smokers; common-sense to insurers – when it comes to deciding on how much you should pay for your cover, insurers view any sort of smoking as just as expensive to cover as the conventional smoking of tobacco cigarettes. It doesn’t matter whether it is a cigar, an e-cigarette or a medical nicotine patch – if you have any smoking behaviour to declare, you could be saying hello to premiums twice that of non-smokers. Remember that drinking habits too are scrutinised by insurers.
- Insure your IP Insurance
- You may run into a situation when you cannot make your premium payments for your IP Policy – perhaps as a result of being out of work but not for reasons which would trigger pay-out. So be canny and take out insurance on your insurance payments: ask for a ‘waiver of premiums’ which will cover your premiums during any period you cannot work.
- Respond now – and reap the benefits later
- If your income goes up whilst you are fit and well, why not make hay while the sun shines? You may well want to up your premium payments. And, if you can prove your salary has gone up, many insurers will allow you to do exactly that.
- Seek flexibility
- Look out for Policies which enable the ‘back-to-day-one’ option – which gives you in the future the right to backdate your pay-outs to the start of when you were unable to work (overruling the usual deferred period).
- Stay realistic
- Your pay-outs will not get to you unscathed. Insurers will automatically deduct from them many forms of income you may, despite your accident or injury, have managed to hold onto – including: dividends from shares, any self-employed income, any sick pay and any other insurance pay-out.
- Look before you leap
- You will need to calculate early on what precise combination of calamity you want to protect your income against – and for how long you expect this protection to last. Remember to factor in existing insurance covers you may already have but not know much about.Are you, for example, already covered at work with any private group scheme? And what about statutory sick pay?
The strength of the IP Insurance sector is also its weakness: the abundance of IP products means consumers can enjoy powerfully-personalised packages – but often only at the cost of a great deal of initial confusion.
But all’s well that ends well. However you research IP Insurance is up to you, but you are in for good luck. Whether you go and speak to an expert or let the “experts” on the internet speak to you, this is an area so rich in related products that you stand to find exactly the deal that suits you – provided you deploy the right pair of expert hands to dig it out of the teeming market.
We hope this gives an insight and some help on the income protection. Here at Holborn Assets, we carry the requisite experience and expertise to help you get started with your investment drive. To learn more, get in touch with a qualified independent financial adviser today.