If you ever become one of the million people in the UK each year that find themselves unable to work due to a serious illness or injury, do you know how you would cope financially?
The truth of the matter is that many individuals would not be able to survive on their savings or on sick pay from work alone. However, according to the 2017 Aviva Protecting our Families report, just 13% of families with dependent children have income protection. You never know when to expect illness or injury but you can count on it to cause a strain on your family’s financial situation.
Income Protection insurance (also known as ‘IP insurance’) is designed to provide a cushion for individuals if they can’t earn an income for any number of specified reasons, as set out in their policy.
For self-employed doctors, unexpected time off can be detrimental. Even something as seemingly harmless as a broken foot or hand could interfere with the demands of your practice. The impact could be even higher for surgeons. The stress of a highly demanding healthcare career could also lead to an individual needing time off. But without a plan to replace your income, you could dip heavily into savings, run up debt, or even risk losing your home if the situation becomes too dire. This could cause even more stress and make a difficult situation worse.
The same Aviva report revealed some shocking statistics concerning individuals without income protection:
- 20% of parents who have lost their income due to illness or injury have been forced to downsize, move in with family, or rent smaller accommodations than they need – some have even become homeless
- 27% of families have experienced a loss of income due to illness, injury, or death of a partner
- 1 in 3 families could not survive just one month without the income of their main provider, even if they only spent the bare minimum needed to get by.
The potential for financial stress even exists for households with two incomes.
Gone are the days when most people could get by with one breadwinner – most families are accustomed to both partners working. In the event that the partnership loses one half of their normal income, their financial stability – either immediately or in the long run – could be in jeopardy. According to research conducted by LV=, almost 60% of dual-income households have absolutely no type of coverage. For families dependent on both spouses working, losing one of those for even a short period of time can be disastrous — not just on finances, but potentially on their relationship as well.
But income protection need not break the bank. Most doctors can secure an affordable policy that provides the peace of mind they need during a strained financial time.
If you work with a financial adviser, they’ll be able to help you decide the right level of protection that’s right for your family.
There are two types of Income Protection policies: short-term and long-term. Your individual needs and circumstances will determine which type of coverage you’ll require. It’s important to note the distinction between Income Protection and Critical Illness cover, which pays out a one-off lump sum, is limited to one claim only, and is more restrictive when it comes to the illnesses that policies cover.
These are meant to provide a regular income until you’re able to return to work, retire, or die. You can find policies that pay out up to 65% of your gross income on a monthly basis. Plus, you can make multiple claims during the life of the policy. In general, you should set payments up to start after your sick pay ends and any other insurance policies you have stop coverage. The longer the waiting period you build in, the lower the monthly premiums. If you think a possible illness or injury could put you out of work for more than two years, then a long-term policy is the way to go. Within long-term policies, there are two types to select from:
- Own occupation – These policies are more focused because they stipulate that in order for the policyholder to qualify as “totally disabled,” they must be unable to perform specific functions of their own job. The keywords here are “own occupation” because the individual only needs to be unable to perform “material and substantial duties” of their own occupation, they don’t need to be completely incapacitated to be considered disabled.
- Any occupation/working tasks – These policies are broader because they interpret “disability” as the inability of the policyholder to gainfully work any job whatsoever that they are reasonably qualified for based on education, work experience, and other aspects related to their particular situation, such as salary. The keyword here is “gainfully” and is defined as securing a role where the individual earns at least 60% of previous earnings.
When searching for the right policy for your needs, you may be able to find a product that begins as an “own occupation” policy but changes to an “any occupation” policy after a predetermined amount of time.
Also known as Accident, Sickness, and Unemployment (ASU) policies, pay outs from these products are limited so claimants usually stop receiving money after one or two years. The types of policies available are:
- Payment Protection Insurance (PPI) – These policies will help you from defaulting on a particular debt so coverage is finite.
- Mortgage Payment Protection Insurance (MPPI)– These policies are specifically for covering the cost of mortgage payments for a predetermined amount of time.
You may be able to find a short-term policy that doesn’t need to be applied to a definite debt amount so be on the lookout for a policy that will be able to bridge the gap between losing your income and finding a new source. If you suddenly become ill or injured, recovery should be your priority. The last thing you need to worry about is how you’ll pay the bills while you’re off work. So don’t leave your future up to fate, safeguard it against things that would do you harm with income protection today.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice. Dental and Medical Financial Services is an appointed representative of Best Practice IFA Group Limited, which is authorised and regulated by the Financial Conduct Authority.