Income protection question

robaber

Hi

I am considering taking out income protection. I already have life insurance. I have a young dependent. 

My employer provides a sliding scale of sick pay, based on the number of years in employment. My current entitlement is 3 months full pay, followed by 3 months half pay. 

In 2 years it will increase to 6 months full time, followed by 6 months half pay. I plan to use savings to help supplement my income during the second 6 months.

I have 6-9 months salary in savings. 

I have quotes from legal and general. 1 year (£13 pm), 2 years (£18 pm) and 5 years (£36 pm) of payout. Payout would be 65% of my income. 

Should I go for 1, 2 or 5 years? 

Should I go for a higher payout for a shorter duration  e.g. 70% for 1 year or a lower payout for a longer duration e.g. 50% for 2 years? 

dunstonh

I would probably go with a split plan matching 6 months half and 6 months full.  Although it would depend on what savings you have and how much you can fund the deferment period.    You have the savings to cover 6 months but if that is all the savings you have, then I wouldn't want to be using them up that way.

I have quotes from legal and general. 1 year (£13 pm), 2 years (£18 pm) and 5 years (£36 pm) of payout. Payout would be 65% of my income. 

If you are going to be on 6 months full/6 months half then a plan that pays out for 1 year is completely pointless.  Statistically, the odds of suffering a long term illness that is more than 12 months but less than two or five years is very low.   If you are going to be ill longer than 12 months then its likely the payout will last longer than 5 years.

Make sure you are looking at proper income protection.  The PHI type and not the PPI type.  Avoid plans with limited payout periods.

Sandtree

Sounds like you are getting quotes for the budget version of Income Protection which is properly known as AS(U) but more commonly as PPI

If you want to stick with this budget product what will your plan be after the X years of the policy you decide on? As dunstonh says, there arent many illnesses that can take you out of work for 18-66 months and you then recover and can return.

Remember also that PPI is an annual policy and so premiums will increase as you get older and as we saw with Covid, events can mean insurers refused to continue cover  and so after 10 years of paying premiums your policy can be cancelled/not renewed.

With PHI it is a long term policy and so cannot be cancelled by the insurer other than for non-payment/fraud and you can set the premiums for the whole policy length (or index link them)

robaber

Sandtree said:

Sounds like you are getting quotes for the budget version of Income Protection which is properly known as AS(U) but more commonly as PPI

If you want to stick with this budget product what will your plan be after the X years of the policy you decide on? As dunstonh says, there arent many illnesses that can take you out of work for 18-66 months and you then recover and can return.

Remember also that PPI is an annual policy and so premiums will increase as you get older and as we saw with Covid, events can mean insurers refused to continue cover  and so after 10 years of paying premiums your policy can be cancelled/not renewed.

With PHI it is a long term policy and so cannot be cancelled by the insurer other than for non-payment/fraud and you can set the premiums for the whole policy length (or index link them)

Thanks both. 

I got the quotes for legal and general, through a broker called lifesearch. 

They explained that the monthly premiums are fixed, until I retire. 

So would you choose a policy that would potentially pay out until you retire?

That sounds great, but very expensive? 

Sandtree

robaber said:
So would you choose a policy that would potentially pay out until you retire?

That sounds great, but very expensive? 

It will be more expensive but whats the alternative? Even if you went with the 5 year plan with a 1 year deferment now what happens in 6 years time when it stops paying out? What level of lifestyle would you have compared to today if your income stops and you are reliant on savings and benefits? How many years would it be until you had a pension and how much will that be reduced by lack of payments in during sickness?

robaber

Sandtree said:

robaber said:
So would you choose a policy that would potentially pay out until you retire?

That sounds great, but very expensive? 

It will be more expensive but whats the alternative? Even if you went with the 5 year plan with a 1 year deferment now what happens in 6 years time when it stops paying out? What level of lifestyle would you have compared to today if your income stops and you are reliant on savings and benefits? How many years would it be until you had a pension and how much will that be reduced by lack of payments in during sickness?

Thanks.

That is very true. 

Is there any insurer or broker anyone would suggest, for this kind of policy?

Skoorb

robaber said:

Sandtree said:

robaber said:
So would you choose a policy that would potentially pay out until you retire?

That sounds great, but very expensive? 

It will be more expensive but whats the alternative? Even if you went with the 5 year plan with a 1 year deferment now what happens in 6 years time when it stops paying out? What level of lifestyle would you have compared to today if your income stops and you are reliant on savings and benefits? How many years would it be until you had a pension and how much will that be reduced by lack of payments in during sickness?

Thanks.

That is very true. 

Is there any insurer or broker anyone would suggest, for this kind of policy?

Yes.  There is only one broker I know of which offers prices online without having to speak to anyone, and rebates all commission as a result, that's Money Minder: https://www.money-minder.com/protection/income-protection/

However, it may be wise to get formal advice on a policy like this to make sure you buy something suitable and appropriate for you, although that will either increase the monthly cost (to pay for the commission to cover the advice) or you can pay the adviser up front for the advice and keep the monthly payments lower.

dunstonh

If you took all the income protection varients, you could pop them into three categories.  Budget, Standard and comprehensive.   If you are clerical worker or low risk occupation, you may not find a massive difference in premiums between the versions.    Sometimes high risk occupations cannot get the better plans.

I generally feel that paying to get a budget plan is false economy.   Yes, sales people may try to get you to buy it as they rely on sales but in reality, it is false economy.  You want a plan that pays out what you need.  Not one that cost you less but doesn't do what you need when you need it.

Weighty1

robaber said:

Sandtree said:

Sounds like you are getting quotes for the budget version of Income Protection which is properly known as AS(U) but more commonly as PPI

If you want to stick with this budget product what will your plan be after the X years of the policy you decide on? As dunstonh says, there arent many illnesses that can take you out of work for 18-66 months and you then recover and can return.

Remember also that PPI is an annual policy and so premiums will increase as you get older and as we saw with Covid, events can mean insurers refused to continue cover  and so after 10 years of paying premiums your policy can be cancelled/not renewed.

With PHI it is a long term policy and so cannot be cancelled by the insurer other than for non-payment/fraud and you can set the premiums for the whole policy length (or index link them)

Thanks both. 

I got the quotes for legal and general, through a broker called lifesearch. 

They explained that the monthly premiums are fixed, until I retire. 

So would you choose a policy that would potentially pay out until you retire?

That sounds great, but very expensive? 

LifeSearch are generally very good (I know, I started my career with them 15-years ago), although it does depend on the experience of the adviser.

Firstly, whilst the premiums will be guaranteed, have they recommended linking the cover to inflation?  If not then cost of living increases could mean the payout is pitiful (in real terms) in 30+ years since everything will have gone up in cost but the payout is the same.  It's imperative that an income protection plan tracks inflation in all but quite specific cases.

Secondly, it often doesn't cost much more to have a plan paying out for as long as ill-health lasts as one which pays for a maximum of 5-years.  In fact, L&G don't even offer a plan which pays for 5-years, they do either 12-months, 24-months of a full term claim so I'm guessing they've recommended a different company for the 5yr option?

I'd almost always recommend a plan with the indefinite claim period.  Average claims across the industry last just in excess of 6-years, so even an average claim would leave you without income for just over a year if you selected the 5-yr claim option.

SaverRate

Speak to Cura Insurance Brokers. Life Insurance | Critical Illness Cover | Income Protection (curainsurance.co.uk) My partner had health issues and they were brilliant. (I do not work for Cura or receive any payback just simly recommending them due to the great service received). I dealt with Alan Knowles their MD

robaber

Thank you for all the suggestions. 

The quotes I had, didn't have payouts which increased in line with inflation. This sounds like a good idea and I have added it to my new quotes.

The quotes I now have for indefinite cover are between £40-60 pm. 

Most offer 50% of my salary as payout. 

I see that some of the brokers charge an upfront fee (£25) but have lower premiums. 

Lifesearch also explained that as I have a bad back, they would have to add an exclusion for this. However, when I am 3 years from taking a day off work, due to my back, I would be able to reapply for a new policy, without the exclusion. 

In the mean time, lifesearch suggested that I use a low start policy, which starts premiums low and increases each year. As I hope to redo the policy in a few years, without an exclusion for my back.