Life’s Mishaps Happen – Are you ready for them?

What would happen to you and your family if you were left unable to work, but without income protection insurance?  Many people understand the importance of life insurance policies and of making a will, but few consider maintaining the mortgage payment, critical illness cover or being able to make a loan payment if they are alive but incapacitated.

Unfortunately, people do get ill or have accidents but then make a recovery and the recovery process can be made hugely less stressful if appropriate financial planning, including the right insurance cover, has been put in place meaning that nobody has to worry about the lack of money to pay the mortgage, essential bills and living expenses.

Those who particularly work on short-term contracts or are self-employed should make it a priority to get unbiased advice from a qualified source, such as a financial advisor, since they are usually the most vulnerable in terms of being unable to work.  Even those in full-time employment could benefit from professional financial advice to be absolutely sure that they have full mortgage cover in place if they ever need it.

Income protection insurance can be broadly divided into three main types.

1. Accident, sickness and unemployment (ASU) cover: this is often considered to be the most basic type of cover.  Medical underwriting does not usually take place before a policy is issued which means that you can not be completely confident that any subsequent claim will be approved.
2. Short-term income protection: cover is fully underwritten from the outset, meaning that you know exactly what is and is not covered by the policy.  The protection is for a fixed duration; usually between one and five years.
3. Long-term income protection: cover is also fully underwritten from the outset and is payable until a specific age (usually retirement age), death or your return to work.

Each of these insurance types is available in three forms.

1. Guaranteed premiums: this is where your premiums will remain the same for as long as you maintain the policy.
2. Reviewable premiums: this means that premiums are reviewed after regular periods of time; usually every five years.  This generally means that they go up every five years or so.
3. Age-related premiums: which means that the premium will go up by an agreed amount every year as you get older.

There are several significant differences between income protection insurance and payment protection insurance (PPI).  For example, income protection insurance provides the plan holder with an income in case of illness or injury, can be used to provide long term cover and is available to most people (including the self-employed).  On the other hand, PPI is used to cover a specific debt payment, when the plan holder has lost their regular income This is often due to unemployment and is only available to people in certain occupations.

While PPI has had some bad press recently, it can be useful for certain types of people. However, it is not a substitute for an Income Protection Insurance policy and certainly not for personalised financial advice from a qualified financial advisor.

Post courtesy of Social Advisors