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What you need to know about income protection insurance

Income Protection is a financial safety net that helps you maintain your lifestyle if you can't work due to illness or injury. It's designed to replace a portion of your income, ensuring you can cover your essential expenses while you recover.

Why is having income protection important?
Life is unpredictable, and illness or accidents can happen to anyone. Income Protection provides peace of mind by offering a steady stream of income when you need it most. No one wants to worry about bills while they're on the road to recovery!

Key Benefits
Financial Security: It helps maintain your standard of living during tough times.
Tax-Free Payments: Income Protection benefits are usually tax-free.
Flexibility: You can tailor your policy to suit your needs.
Long-Term Coverage: Some policies offer protection until retirement age.

Do I really need income protection?

Whether you need income protection insurance depends on your individual circumstances, financial situation, and risk tolerance. Here are some factors to consider when deciding if income protection insurance is right for you:

Financial Dependents: If you have dependents who rely on your income to cover living expenses, such as a spouse, children, or elderly parents, income protection can be vital. It ensures that your loved ones are financially secure even if you can't work.

Savings and Emergency Fund: Evaluate your savings and emergency fund. If you have substantial savings that could sustain you and your dependents during a period of illness or injury, you may have a lower need for income protection. However, consider how long those savings would last if you couldn't work for an extended period.

Employer Benefits: Check if your employer offers any sickness or disability benefits. While some employers provide sick pay, it may not cover your full salary or be long-lasting.

Self-Employment: If you're self-employed or a freelancer without access to sick pay, income protection can be particularly valuable because you don't have the safety net of employer benefits.

How does it work?
You pay a monthly premium, and if you can't work due to illness or injury, your policy kicks in. Typically, there's a waiting period before benefits start, and then you'll receive regular payments to cover your lost income.

How do I work out what level of cover I need?

When buying income protection insurance, it's essential to consider various factors to ensure that the policy aligns with your needs and provides comprehensive coverage. Here are key aspects to take into account:

Coverage Period: Determine how long you want the coverage to last. Some policies provide benefits until retirement age, while others may offer coverage for a fixed number of years.

Monthly Benefit Amount: Calculate the amount you need to cover your essential expenses, such as mortgage or rent, bills, and living costs. Ensure the policy offers a monthly benefit that matches or comes close to this amount.

Waiting Period (Elimination Period): This is the time you must wait after becoming unable to work before the policy starts paying benefits. A longer waiting period can lower your premiums, but it means you'll need alternative income sources during that time.

Benefit Period: Determine how long you want the policy to pay benefits once the waiting period is over. It can range from a few years to until retirement.

Definition of Disability: Understand how the policy defines disability. Some policies consider any occupation, while others may focus on your ability to perform your own occupation. The latter typically offers more comprehensive coverage.

Exclusions and Limitations: Review the policy's exclusions and limitations, which outline situations or conditions not covered by the insurance. Be aware of any pre-existing medical conditions that might be excluded.

Premiums: Calculate the cost of premiums and ensure it fits your budget. Premiums can vary based on factors like age, health, occupation, and coverage amount.

Indexation: Consider whether you want your benefit amount to increase with inflation. Indexation helps your coverage keep pace with rising costs but can increase premiums over time.

Policy Renewal and Cancellation: Understand the terms for renewing or canceling the policy. Some policies may guarantee renewals up to a certain age, while others may have more restrictive conditions.

Claims Process: Familiarise yourself with the claims process, including documentation requirements and how long it typically takes for benefits to be paid.

Insurer's Reputation and Financial Strength: Research the insurance company's reputation and financial stability to ensure they can fulfill their commitments.

Professional Advice: Consider consulting with a financial advisor or insurance expert who can help you understand the policy's terms and make informed decisions.

Comparison Shopping: Don't settle for the first policy you come across. Compare multiple insurance providers to find the best coverage at a competitive price.

Taking these factors into account will help you choose an income protection insurance policy that suits your specific needs and provides the peace of mind you deserve.

What impacts the monthly premium costs of income protection insurance

The monthly premium costs of income protection insurance are influenced by several factors. Insurance companies take these factors into consideration when determining the cost of coverage. Here are the key factors that impact the premium costs:

Age: Generally, the older you are when you purchase income protection insurance, the higher your premiums will be. This is because the risk of illness or disability tends to increase with age.

Health: Your current health and medical history play a significant role in premium calculation. If you have pre-existing medical conditions or a history of serious illnesses, your premiums may be higher. Insurers may request a medical examination or review your medical records.

Occupation: Your occupation affects the risk level associated with your job. Riskier occupations that have a higher likelihood of injury or illness may result in higher premiums. Conversely, less risky jobs typically have lower premiums.

Smoking Status: Smokers tend to pay higher premiums than non-smokers. This is because smoking is associated with various health risks and conditions.

Coverage Amount: The monthly benefit amount you choose will directly impact your premium. The higher the benefit you select, the more you'll pay in premiums.

Benefit Period: The duration for which you want the policy to pay benefits (e.g., 2 years, 5 years, until retirement) affects your premium. Longer benefit periods generally result in higher premiums.

Waiting Period (Elimination Period): A shorter waiting period before benefits start will lead to higher premiums because it means the insurance company will have to start paying benefits sooner.

Gender: Some insurers consider gender when calculating premiums. Historically, women have been charged lower premiums than men because they tend to have a longer life expectancy and lower risk of certain health conditions.

Policy Type: The type of income protection policy you choose, such as an own-occupation policy (which covers you if you can't perform your specific job) or any-occupation policy (which covers you only if you can't perform any job), can impact the premium cost.

Exclusions: If you have specific exclusions in your policy due to pre-existing conditions or other factors, your premiums may be adjusted accordingly.

Getting the right policy

Choosing the right Income Protection policy is crucial. Factors like your occupation, age, and health can influence the cost and coverage. It's a good idea to consult with a financial adviser to find the best fit for you which is why the Lync Wealth Management Team are on hand to support you every step of the way.

To find out more information on how Lync Wealth Management can help you meet your financial objectives, get in touch with the team today