Many of us hold a life insurance policy that is designed to protect our family, or pay off our mortgage. We are also aware of the benefits of critical illness insurance, which provides a lump sum in the event of serious health issues.
However, far fewer of us avail of the range of insurances that can provide regular payments to replace our salary, in the event that we are suddenly deprived of our working income.
Here are the main options available.
Income Protection Insurance (IPI) provides a monthly payment when you are unable to work due to illness. It is different to critical illness insurance in that it does not pay a lump sum, but pays a regular income over an agreed term, usually 12 or 24 months. Income protection insurance does not pay your full salary; as a rule you could expect to receive around 50% of your previous monthly pay, tax-free. Payment does not begin immediately, but after an agreed ‘deferred period’ ranging from 4 weeks to 2 years. The longer the deferred period, the cheaper the premium you pay. Confusingly, income protection insurance is also known as ‘disability insurance’ and ‘income replacement insurance’. It does not cover redundancy.
Permanent Health Insurance (PHI Insurance)
Permanent health insurance operates in a similar way to income protection insurance above, but is a much longer-term product. Permanent health insurance can actually cover you from the onset of illness up until your retirement. Again, this product provides a regular income to help pay the bills, and does not cover redundancy. Both these insurances can be invaluable to the self-employed, who may have no other means of supporting themselves in the event of ill-health.
Accident, Sickness & Unemployment Insurance (ASU)
ASU cover is the only income protection product that covers redundancy, in addition to covering health-related loss of income. As with the other insurances above, cover begins after a deferred period, and usually runs for 12 or 24 months.
Mortgage Payment Protection Insurance
When ASU cover (see above) is set up specifically in relation to mortgage repayments, it is known as mortgage payment protection insurance (MPPI). This will, in the event of a medical setback, redundancy or unemployment, cover the cost of your mortgage repayments for an agreed period of 12 or 24 months, or until you return to work, depending on the policy you choose.
These valuable insurances are certainly worth considering as additions to a balanced financial plan. As with all insurance products, the various policies available have their own unique terms and conditions. The assistance of a financial adviser is crucial to understanding the exclusions covered in the ‘small print’ of your insurance policy.
