The value of Income Protection

Whether you’re a business owner or an employee, it’s easy to take your regular income for granted. But what if something was to happen to you so you couldn’t work, or earn your regular income for a set period of time, or even permanently? How would you and your loved one’s cope? And even if you could cope for a short time, how long would it be before you started to feel the pinch?

Income protection cover is one option that could enable you to carry on if you did lose your income for any reason.

Considering income protection cover

If you are in the early to mid-stage of your career, your income is going to be one of the most important issues for you. Depending on your circumstances, you may be looking to get on the property ladder or start a family. Whatever your ambitions, in most cases you’ll need a regular income to achieve them.

That’s why we believe that income protection policies are an important consideration for our clients. Yet, for many people, the cost of income protection compared to, say, a life insurance policy, can be prohibitive. Often, the reason why income protection may seem expensive is because you are far more likely to need it – and benefit from it. That’s why we will always sit down with you to balance the relative costs against the potential benefits and discuss your attitude to risk, before advising on whether income protection is right for you.

Let’s take a look at an example of how income protection might benefit you.

How it might work

Sam has joined a new company after spending most of her working life at a large company that offered sick pay. The new company does not offer sick pay, so Sam talks to her IFA, who explains that income protection is the best approach, but that it’s fairly high cost. Sam looks at the costs and decides to leave it for the time being.

Six months later, Sam is injured in a car accident and is off work for six months. Now, she doesn’t have any income except statutory sick pay, which is just over £95 a week.

How income protection might have helped

Like many people, Sam didn’t realise the value of income protection until she needed it. Yet, income protection is something that most people are likely to need during their working lives. In fact, between the ages of 25 and 65, 75% of people will take time off work due to illness or as a result of an accident. This is one of the reasons why income protection seems relatively costly.

With income protection cover, Sam would have been able to continue paying her bills, while recovering from the effects of the car accident. Instead, like many people without this protection, as well as going through painful treatment, she also had the additional worry of how she was going to pay her mortgage.

Income protection v Life cover

Sam’s view of income protection – that the costs outweigh the benefits – is a common one. Yet, many people will take out life insurance cover in their 20s or 30s, even though they’re far less likely to need that cover, compared to income protection, at that stage of their lives. In fact, according to a large insurance provider, there’s only a 10% chance that you’ll die between the ages of 25 and 65 – the average age of claimants for their life insurance policies in 2020 was 68 years old.

A calculation shows that if you’re a 35 year-old male non-smoker and you intend to retire when you reach 68, you have a 6.9% chance of dying before you retire, compared to a 37.7% chance of being unable to work for at least a month before you retire. For females of the same age and profile, the figures are a 4.9% chance of dying, and a 48.8% chance of not being able to work for a month or more.

What’s more, in 2020, the average age of a claimant for life insurance was 68 and the average length of a policy at claim was nine years, while income protection claimants were on average 41 years old and had held their policies for just four years. The average monthly payment to income protection claimants was £872.

Which protection is right for you?

These calculations highlight the real benefits of income protection for many people. But these benefits will always depend on your own personal circumstances, and they may still be too costly for some. That’s why we will always sit down with you to work out what’s best for your needs. For example, some income protection policies have fixed costs for the duration of the policy, so as your income increases over time, the costs become relatively lower.

Alternatively, we may look at Family Income Benefit, rather than income protection. This offers life cover, with a monthly payment to your family in the event of your death or if you become critically ill. It guarantees that your income will still come into the household each month. Of course, we would need to look at your individual circumstances before recommending this, as it can be expensive, particularly if you have a high income.

Talk to us

Whatever stage you have reached in your life or career, some form of income protection may be able to provide reassurance that if things unfortunately go wrong, you and your loved ones will still be covered.