There is much confusion over terminology for this type of plan and it can mean different things to different people. What we are talking about is protecting your income in the event of you being unable to work as a result of illness, accident or incapacity. This type of plan doesn't cover redundancy.
Income protection plans can be arranged personally or on a group basis by larger employers. The amounts that can be insured and the tax treatment differ, but essentially the same type of benefit is provided. Benefits are usually paid monthly and can be payable until the plan or scheme ceasing age which ideally should coincide with your anticipated retirement age.
This type of cover is very important for anyone self-employed where income could cease very quickly in the event of illness or incapacity. For those who are employed it is vital to understand your employee benefit arrangements, for example, how long would you be paid for by your employer. You can't receive benefits under an income protection plan and salary at the same time if this would mean exceeding the maximum payable under the plan.
Benefits under individual plans are limited to approximately 50% of salary because claim payments are payable free of income tax. Benefits under group scheme can be up to 75% of salary and are paid to employees as salary with income tax and national insurance deducted.
Of course there is a State Incapacity Benefit but not all will qualify for this. The Government is committed to reducing the number of claimants receiving Incapacity Benefits.
There are a number of factors which determine the cost of income protection plans:
- Smoker status
- Deferred period - the length of time before claim payments will start, common deferred periods are 4, 13, 26 and 52 weeks. The shorter the deferred period, the dearer the cost
- Ceasing age
- Sum insured
- Occupation - rated from class 1 for low risk occupations for class 4 for higher risk occupations.
The advantage of income protection plans is that they protect income for as long as the plan holder remains unable to perform their own occupation because of incapacity, usually irrespective of the cause. There are very few, if any, exclusions.