Income Protection Insurance
The impact of not being able to work for a long period of time for some families could have a dramatic effect on their finances. How much you will get paid if you are off sick, will depend on your employer.
The likelihood of being off work due to an accident or illness is far greater than you may think. In the UK there are currently over 27 Million Workers. It is estimated that over 2 Million of these workers will claim the State Incapacity benefit at any point in time.
Many employers will continue to pay salary for a period of time; some might not pay anything, apart for the Statutory Sick pay benefit. Most families would not be able to survive on the current level of statutory sick pay. If you are self employed the situation is even worse. Most self employed people are not entitled to statutory sick pay at all.
One solution is to take out an Income Protection Policy (IPP). IPP is also known as Permanent Health Insurance.
How does it work?
Income protection insurance is designed to pay you a regular monthly income if you can't work due to sickness or disability. Payments will continue until you either return to paid work or you retire.
If you decide to take out an Income protection policy then you will need to work out how much you could claim for. This will depend on your income. In some cases, it is possible to take into account other benefits such as pension contributions, National Insurance and if you are business owner dividends.
You will also need to decide on a deferred period. The deferred period is how long you need to be off of work before you can claim. It is possible to choose the length of the deferred period, for example, 1 week, 4 or 8 weeks or even up to 26 and 52 week deferred periods. The shorter the period the more the cover is likely to cost due to the increased risk.
The cost of cover is usually based on your age, health, the amount of cover, your occupation and if you have any existing medical conditions. If you submit an application then the insurance provider will underwrite the application to establish if they can offer cover and the cost.
Tax Situation
If the Income Protection policy is taken out on an individual basis then the benefits will be paid to you tax free. If your employer pays the premiums for you, then the premium will be classed as a taxable benefit. There is however a limit in terms of how much you can claim.
It is also possible to an employer to set up a Group income protection arrangement, to cover its employees. If the premiums are paid by the employer then the benefits paid to the employee would be subject to tax and National Insurance.
