Income protection insurance is one of those rare financial services products that does exactly what it says on the tin – it protects your income. This can prove to be a financial lifesaver in the event of an accident or sickness that keeps you off work for several months or a period of involuntary unemployment, when, of course, there is no other income coming in. That is why you may also hear it called ASU insurance – accident, sickness and unemployment insurance – as it covers you against the financial fallout of falling victim to one of these events.
To clarify, the product we are referring to is income payment protection insurance which offers a short term financial solution in the event that you lose your income due to one of the aforementioned events. It is different to the longer term permanent health insurance (PHI) policy that pays out if you are unable to work due to permanent sickness and which does not cover unemployment.
What is income protection insurance?
The beauty of income payment protection insurance really is that it really is as simple as it sounds. In the event of one of the clearly defined risks occurring, the policy pays out a regular monthly benefit that can be used entirely at your discretion as a replacement form of income. So, you may wish to use the income to service your rent or mortgage repayments or simply use it to meet every day living costs such as grocery bills or fuel. It is entirely up to you.
Payments then continue on a monthly basis until you are well enough to return to work, have found another job, or after a maximum of 12 such monthly payouts (a more expensive type of policy will even provide payments for up to a maximum of 24 months, if necessary).
How much will it pay out?
In terms of the level of income that the insurance can provide in the event of a claim, this is something for you to decide at the outset, taking into account the cost of the (what can be remarkably modest) monthly premium you wish to pay. Although the actual limits will vary from insurer to insurer, it is typically possible to insure up to 50% of your normally earned income, or up to £1,500 a month, whichever is the smaller figure.
And an important point to note is that all this income is tax free too!
Thus, income protection insurance offers a simple, affordable and straight forward means of securing a significant replacement income in the event of some of the most common misfortunes occurring that lead to an interruption in regular pay from work. It is designed to ensure that life goes on very much as normal – and important household expenditure continues to be met – even when accident, sickness or unemployment strikes.
And the good news is that an income protection insurance policy does not need to cost a lot. Income cover can be bought from just a few pounds a month, meaning you won’t have to break the bank in order to have peace of mind.