Income Protection Insurance explained for your benefit

In the good times, when we are sure that there will be a job for us the next day, many of us like to forget about the possibilities of losing the ability to work and earn a wage. So what happens if we have an accident or become seriously ill? One of the main ways of protecting ourselves is by taking out an IPI, or Income Protection Insurance. This type of policy is designed to pay out if your health situation changes, leaving you unable to work due to illness or accident.

IPI policies have a long list of conditions attached and should be read carefully before purchasing. What is the point of buying a policy if it’s small print makes it nearly impossible for you to claim on? Therefore, it is essential that you understand how the insurer terms ‘incapacity’. Generally, this is when the policyholder is unable to perform an occupation due to illness or after suffering an accident. If the insurer is specifying that a claim can only be made on a ‘suited’ occupation, then it means that the accident or illness prevents you from performing work suited to your training and education. Another definition of incapacity relates to your inability to perform a series of specified actions after an illness or accident. These defined functions are based on everyday living. Can you dress and wash yourself? How difficult is it to climb stairs or go shopping? Are you able to cook food on your own?

It is also wise to go through the terms and conditions on the policy in order to find out what limits are placed on claiming benefits. Many policies will state that the pay out will only be equivalent to just over two thirds of your normal gross earnings. This figure could be much lower for people previously earning in higher pay brackets. There are also incentives provided in many policies, designed to get you back to work. These often consist of a reduced pay out if you find a part-time or lower-paid occupation during the period of your recovery.

What happens if the accident was serious and meant that you were permanently unable to carry out an occupation? The policy will categorise how this works. It will state how benefits are paid after a deferred amount of time has passed. The payments continue until your death, recovery, or retirement. The delay (or deferment) on payments starting can stretch from just one month up to a full year. Policies make a distinction between a claim made down to an illness or accident, and incapacity due to your own fault. These exclusions cover things like alcohol intake, drug abuse, war and pregnancy.

If you already have a policy sorted out and then change career, then it is advisable to talk to your insurer to find out if your IPI still covers you. For example, if you were formerly an office worker, but then became a fire fighter, then the level of risk would change. This is quite a defined example, but it is wise to check you are still covered whenever you change occupation.

There are a number of variations on the standard IPI policy. Unit-linked policies are similar to life assurance policies but have no surrender value. There are also, so called, renewable IPIs. They give you the chance to renew after five years. The benefit of this kind of policy is that premiums can be cheaper. There is a reviewable option – giving the insurer the opportunity to review rates every few years. Initial premiums on these can be cheaper – but can also rise at each review. There are also policies where the benefit payable reduces because of inflation. These are termed increasing IPIs. Some employers offer IPIs to their workforce – however, the policy is likely to cease when you leave or become redundant.

Income Protection Insurance are a company that will pay out if your health situation changes due to an illness or accident that leaves you unable to work, paying up until you recover, retire or pass away.