You’ve probably taken the time to insure your valuable assets, such as your home or car, but what about your income? When you are unable to work, income protection insurance allows you to keep your income.
Income protection insurance can cover up to 70% of your gross earnings for a set period of time (for example, for two years or until age 70, depending on the benefit period chosen).
While you are recovering, these payments will replace your salary, allowing you to manage your daily living expenses such as education, mortgage payments, groceries, gasoline, entertainment, and health care.
An income protection policy can assist in covering essential living expenses such as the mortgage, rent, and bills, easing financial strain until you are ready to return to work or retire.
This article will provide you with a thorough understanding of income protection insurance in 2023.
Income Protection Insurance Definition
Income protection insurance is intended to replace a portion of your monthly earnings if you are unable to work due to illness or injury. It pays a tax-free monthly benefit and continues to do so until you recover and are able to return to work, your policy expires, or you retire.
IPI is intended to help you and your family cover your regular outgoings and maintain your lifestyle if something bad and unexpected happens.
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Why Income Protection Insurance?
Income protection can be beneficial for people who are the sole source of income, regardless of whether they have dependents. If you have dependents on your income, it reduces the financial stress for them and yourself if you become ill or injured and are unable to work.
Having this financial protection in place can ensure that you and your loved ones can continue to live the lifestyle you have worked so hard to achieve, even if you are unable to work.
How Does Income Protection Insurance Work?
IPI works in the following ways:
- If you are unable to work due to illness or an accident, you will receive regular payments that will replace a portion of your income.
- Pays out until you are able to return to work – or until you retire, die, or reach the end of the policy term – whichever comes first.
- If you are unable to work, you will typically receive between 50 and 65 percent of your income.
- Covers the majority of illnesses that render you unable to work – either temporarily or permanently (depending on the type of policy and its definition of incapacity)
Types of Income Protection Cover
The two types of Income protection insurance available are:
- Short-term income protection insurance
- Long-term income protection insurance
A short-term or long-term income protection insurance policy is available.
Short-term income protection insurance can protect you in the event of illness, injury, or involuntary redundancy.
Some short-term policies pay if you are unable to perform a specific aspect of your job; this is known as an ‘own occupation’ policy. There are also suitable task policies, which do not pay out if your employer has other types of work available to you.
Long-term IPI in the UK will typically cover you until you return to work, retire, or the income protection cover expires.
These policies typically begin with five years of coverage. It’s a type of insurance for more serious situations that require you to miss work for an extended period of time.
Should You Get Income Protection Insurance?
Income protection insurance is necessary if you:
- You may not have sick or annual leave if you are self-employed or own a small business.
- have family members or dependents who rely on your income
- have debt, such as a mortgage, on which you must make payments even if you are unable to work
Make a budget to determine how much income protection you require. This will assist you in determining your monthly expenses as well as the income you will need to replace. You should also consider making contributions to your superannuation.
Consider the following:
- If you have total or permanent disability or trauma insurance, it may be able to help you replace lost income.
- If you have private health insurance, it may cover some of your medical expenses.
- What assistance or support may be available from family or friends
Speak with a financial adviser if you need help determining whether you need income protection insurance and how much you need.
Which Income Protection Insurance Is the Best UK
The best type of income protection insurance UK providers can provide is one that meets your specific requirements. The best policy for you will cover you for what you want, for as long as you want, and with the lowest monthly premiums.
Compare income protection insurance policies from as many insurers as possible to find the best deal. Obtaining a large number of income protection quotes allows you to select the cheapest income protection quote that meets your needs. You can check with companies like Aviva.
Is Income Protection Insurance Tax Deductible UK
In most cases, Income Protection payouts are tax-free. When it comes to personal policies, because you pay the premiums out of your own pocket, the policy has already been effectively taxed. This is why most insurers will only allow you to insure 65 percent of your gross income, which is roughly the same as your net income.
Some business executives pay for their income protection premiums through their companies. This is referred to as executive income protection.
The company pays premiums in this case, and they are usually deductible as a business expense.
This means that the policy was not taxed at the payment stage and is generally taxable as income on a claim. Benefits will be paid back to the company because the company owns and pays for the policy, and distributions to the individual insured will be taxed accordingly.
Always seek advice from your tax adviser or accountant to ensure you understand any tax implications.
How Much Does Income Protection Insurance Cost
Your health, whether you smoke, and the level of coverage required will all factor into your premium, but your job also plays a significant role in determining how much you’ll pay.
Many insurers categorize jobs into four risk categories, though some have more. Jobs, for example, can be classified as follows:
- Class 1: Professionals, managers, administrative personnel, employees with limited business mileage, administrative clerks, computer programmers, and secretaries.
- Class 2: Some workers who travel a lot for business; skilled manual labour; an engineer; a florist; a shop assistant
- Class 3: Skilled manual workers and some semi-skilled workers; a caregiver; a plumber; and a teacher.
- While Heavy manual workers and some unskilled workers are classified as class 4
The riskier your job, the more likely it is that you will need to file a claim. As a result, those in the riskiest occupations typically pay higher premiums.
How to Claim Income Protection Insurance
Step 1: Contact your employer and insurance provider
You should do this as soon as you become ill or injured and are unable to work. Your insurer will then send you the necessary paperwork to file the claim.
Step 2: Complete the claim form
A salary continuation report, a tax file number declaration form, an income replacement employer report, information about your leave, and payment history for the previous 12 months. Also, certified proof of age, such as your driver’s license, birth certificate, or passport, will be required.
Step 3: Wait for a response from your insurer
Send the completed paperwork to your insurer via mail or email. Your claim will be evaluated once the waiting period you selected when you purchased the policy expires.
How to Cancel Income Protection Insurance
When you purchase IPI, you usually have 30 days to cancel and receive a full refund.
If you decide to cancel the policy after 30 days, you may be refunded less than the amount you paid. Examine the terms and conditions of your policy.
Is Income Protection Insurance Worth It?
Income protection insurance UK is worth it because it provides a regular income if you cannot work due to illness or disability, and it continues until you return to paid work or retire. Permanent health insurance is another name for income protection insurance.
The amount of income you are permitted to claim will not replace the exact amount of money you were earning prior to being forced to stop working. You can expect to receive half to two-thirds of your pre-tax earnings from your regular job. This is due to the fact that some money will be deducted for any state benefits you may be eligible for, and the income you receive from the policy is tax-free.
If you become ill or disabled, you cannot immediately claim income protection payments.
Conclusion
Income Protection protects you against the risk of being unable to work due to an accident or illness. Many of us have little to no savings and would likely struggle if we were unable to work. – how would you cope?
Given your options, you should be very deliberate about your income insurance. We hope that this guide will assist you in determining whether you truly require income protection insurance in 2023.
FAQs about Income protection insurance
Income protection payments are taxed in the same way as regular income. When you file your claim, you must provide your tax file number so that your income protection payments can be taxed on a pay-as-you-go (PAYG) basis. If you do not provide your tax file number, your insurer is required by law to withhold tax at the highest marginal tax rate rather than the lower personal tax rate from your benefit payments.
If you held a policy outside of superannuation, your premium payments are tax-deductible, so you can claim a portion of what you paid back when you file your tax return.
Income Protection Insurance provides financial assistance if you are unable to work due to an injury or illness and suffer a loss of earnings.
An IPI claim usually takes two to three months to start paying you. The length of time depends on the waiting period you choose when you purchase a policy and whether your insurer requires additional information before accepting your claim.
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