So You’ve Decided To Take Out Income Protection Insurance – How Do You Choose The Right Cover?
The conversation about income protection insurance usually trends towards whether or not it is a valuable investment for you to make as part of your overall personal and business financial strategy. But assuming you have made the clever decision to take out an income protection policy, protecting your future financial position in the event of an unforeseen incident that stops you from earning your normal income – how do you work out which is the right policy for you?
Income protection insurance is a well-established financial strategy for ensuring that, in the event of illness or injury, you can continue to receive regular income payments up to a certain percentage of your normal salary or wages. It is a particularly sensible strategy for those who run their own business, either as a sole trader or SME, where there may be little or no alternative recourse to income.
Like any financial strategy, choosing the right income protection insurance strategy requires carefully considering your specific personal and business circumstances. Getting it right means assessing the specifics of the alternatives and making sure the policy you choose is the right one for you. Take the time to ask the following questions:
1. What’s covered?
Understanding what events and incidents you can be covered for is an essential starting point. Some policies, for example, may have limits on particular types of illnesses.
2. How much will I get paid?
Income Protection insurance pay outs are typically calculated as a percentage of your historic income over a defined period of time. This can vary up to 85 per cent of your income over the agreed period, although typically is about 75 per cent of your pre-incident income for the previous 12 months.
3. How long will I get paid for?
Typically, this depends on how much you are prepared to pay. It will be limited either by a fixed number of weeks or age.
4. How much cover do I need?
This bit means a bit of work on your part – what is your family budget to meet the basics? Think about mortgage or rent payments, school fees, travel costs, car loans, monthly utilities bills, typical grocery costs and similar.
5. How much will it cost?
The first consideration here is – shop around. Assuming you know the answers to the other questions, look at the alternatives that meet your specific requirements.
6. What about the fine print?
Understanding the fine print is essential, particularly for income protection insurance – if you and your family are depending on this income to maintain your quality of life, you need to know, for example, whether the policy provides for the insurer to change the goalposts on any critical components in the future based on changes to your health, income or other personal circumstances.
If you’ve made the decision to take out income protection insurance, you are a step closer to a secure financial strategy. But now it’s time to start working through the detail and make sure that what you’re paying for will meet your needs.