Income Protection Guide

UKinsurancenet Guide to Income Protection Insurance

During their working life many people will suffer financial hardship purely as a result of becoming ill, or suffering from an injury which will result in them being unable to work.

Should this happen to you then state benefits will only offer a very minimal level of support and assistance. Eligibility for benefits such as incapacity benefit continue to be strictly controlled with indications from that current Government that qualifying for this type of benefit will get even harder in the future as other lower level benefits schemes are introduced so as to reduce expenditure in this area. Clearly then there is a compelling need for the individual to take ownership and to have some form of private provision in place to meet this need.

Currently after only 28 weeks of illness then each claimant has to be prepared to undergo tests which will check the individuals’ ability to perform a series of tests, some of which are work related, and others less demanding such as walking and climbing the stairs.

Even if someone does qualify for state benefits then whilst they are far from generous the majority of them are either taxable, or means tested. This means that even though you may receive Long Term Incapacity Benefit and or other State benefits. The majority of these state benefits are means-tested, which means that there are certain conditions that have to be met, one of which is that you must have paid sufficient National Insurance contributions.

On the other hand if for example you have any money on deposit or bonds, national savings certificates or any other form of security that produces any income, then these to will be taken into consideration when assessing any entitlement you may have to benefits, and even though you may decide to cash in some of your investments earlier than originally planned. Then dependant on the amounts in question they will most likely affect your eligibility for the majority of State benefits.

What can you do about this, well very little in the current climate as each successive government has a similar agenda which is to control the amount of money it pays out each week in benefits, which in effect means that the state is very unlikely to provide the answer.

In the vast majority of cases then the first thing you will need to consider is what might happen to your income and your expenses if you were too ill to work. Any future or potential sources of income will depend on entirely on your personal circumstances.

It will be okay as my employer offers a scheme and they will look after me.

Clearly this may or may not be the case however the situation currently is as follows, if you are an employee and you fall ill, then your employer might pay you your full pay for a few weeks, or even months.

It is a statutory obligation that your employer pays statutory sick pay for 28 weeks. There is no obligation on your employer to pay any sick pay after this period has expired. This amount payable will be a lot less than your current earnings. The amount which is currently payable for Statutory Sick Pay is £80.00 per week, and this is likely to be a less than you earn. Again what this means is that once you have been off work for 28 weeks through either sickness or accident then you would probably have to rely on any state benefits.

As we have already said state benefits cannot be described as generous and without doubt the vast majority of employees would see a substantial drop in their income. Clearly any individual is likely to see a substantial fall in their standard of living if they were out of work for more than a couple of months either through illness or disability.

In every case where you may be considering taking out income protection insurance, then you should check always check first to see what arrangements your employer may have made.
If you are self-employed or a member of a partnership:

Then clearly as there are no employer benefits to speak of, then your income will almost certainly cease immediately. However, dependant on the type of business you are involved in then your business could continue to generate income albeit for a short time if, for instance, you have already sent out invoices and payment is outstanding for work already completed.

Alternatively you may have other partners or family involved in the business but clearly there is a limit to the amount of ongoing financial support that they or anyone else could be expected to provide before applying for state benefits becomes a reality.

Another option that both employed and self employed may have to consider is to take early retirement and to start drawing on any pension arrangements they may have put in place.

If you are deemed seriously ill then you may be able to start receiving an early retirement pension from your employer, however this will depend on the rules of any pension scheme(s) to which you belong, including any state earnings related plans and may also be at your employer’s discretion. Again you are likely to lose out on these as any pension which starts to pay out early, is likely to be significantly lower than if you had worked until normal retirement age.

Likewise this latter point of being forced to take pension benefits early is a significant factor in the retirement planning for anyone who is self employed. Taking benefits early can have a dramatic impact on not just the size of the fund and the potential pension, but clearly taking pension benefits early by cashing in the plan, and thereby taking a greatly reduced income will have a dramatic impact on both the individuals and their dependant’s living standards, not just in the short term, but for the rest of their lives.