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True to its name, this policy simply protects your income should you be unable to work for an indefinite length of time as a result of sickness, accident or injury.
How does it work?If any of these events do occur, income protection insurance will pay out a tax-free monthly sum, typically of up to 60% of your previous income. It is designed to work in tandem with any sickness benefits that you may receive from your employer – payment will kick in when these have come to an end. That’s why there may be a ‘deferred period’ – which means a certain time you must wait before payment starts – on your income protection policy.
Income protection policies can be set up until retirement age but, of course, if you recover from your accident or illness, or you get another job, payment will stop. However, income protection is exclusive in the sense that it stays ‘live’ after this event. You can claim as many times as you like during the agreed term of the policy and even for the same thing twice.
How is my premium calculated?The length of your deferment period will be a determining factor in how much you pay – the longer it is, the less chance of the insurer paying out, so the cheaper your premium. However, premiums are more heavily based on your occupation. The higher risk the insurer deems your job to be, the higher premium it will charge. So fire-fighters, stuntmen and even magicians will get a tough ride. And, unlike many other types of insurance, when it comes to income protection women are charged more.
What are the pros and cons?Income protection is usually a fairly recommended product. It is flexible and ongoing and, once arranged with the insurer, terms and conditions cannot be changed. But it does have some downsides. For example – unlike most critical illness policies – it does not include death benefit and for certain people it can prove very expensive.
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