INCOME PROTECTION INSURANCE

Guide to Income Protection Insurance

If you're worried about illness or redundancy and keeping up your income repayments, an income protection insurance policy might bridge the gap.

The state used to pay the interest on your income for you if you were unemployed or too ill to work. In 1995, however, the Government implemented a new system and is now encouraging homebuyers to take out private income protection insurance cover for their income payments.

This is called income protection insurance and has been introduced as an alternative to State Benefit. The aim of income protection insurance is to cover your mortgage payments should you be made redundant or fall ill and become unable to work. An income protection insurance policy should cover your monthly interest, capital repayments and any other additional expenses such as investments used as repayment vehicles, as the cost is based on the size of your monthly income expenses.

As with any insurance policy, you pay a premium each month towards your income protection insurance and if the worst happens, the policy will start to pay out after the excess period. There are a variety of income protection insurance policies available. You can go to an independent broker for your income protection insurance policy, or your mortgage company may offer income protection insurance as part of your mortgage deal.

Choosing a policy

As the main earner and your family may rely on your income, so the wider the circumstances your income protection insurance policy covers the better. However, you should look at your personal circumstances before making a decision about which income protection insurance plan to choose. There are many different ones available, offering anything from life insurance to cover for disability sickness and critical illness. You may think income protection insurance is a good idea but feel your job is secure, so don't see the need for paying out for the full package. If this is the case then think about insurance to cover your health.

Always look at the small print before you commit yourself to an income protection insurance policy, as there may be restrictions built in. Most income protection insurance policies won't pay out in the first six months of taking it out. If you make a claim after this period, you should receive a payout after 30 days. The benefit is usually calculated on a daily basis and paid one month in arrears, so for the first two months you will have to meet the mortgage payments yourself. Some existing income protection insurance policies delay payment and will only issue funds after 90 or 120 days, although new income protection insurance policies should all payout after 30 days.

Another factor you should consider is any exclusion in an income protection insurance policy. Insurers are likely to exclude any medical conditions you have had before you take out the policy. Others might exclude stress, back problems and pregnancy.

You should also check whether you are covered if you work part-time or are on a temporary contract. It is a good idea to investigate your income protection insurance attitude to unemployment. For example, if you undertake any training while unemployed, dose your insurer expect you to be actively looking for a new job at the same time?

The cost of Income Protection

The price of an income protection insurance policy is usually based on the number of exclusions featured, and in some cases on the level of commission the insurer is receiving. Prices can vary widely for income protection insurance with quotes ranging from £3 to £9 per £100 of cover, so it's best to shop around before you part with our money.

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