Anyone imagining the worst disaster that could happen to their personal finances is likely to include somewhere along the line the sudden and unexpected loss of their normal income from work. With the income safely in the bank each month, it is possible to pay the mortgage or rent, utility bills and a pile of other household bills. When that income fails to arrive, all manner of problems begin to pile up – unless, of course, you have taken the prior precaution of investing in income insurance.
This is a simple, straight forward and modestly priced financial product that provides a regular, replacement monthly income when the one from work is unexpectedly lost. Insured benefits are paid directly to the policy holder and can be spent in exactly the same way as the normally earned income, and come with the added advantage of being completely tax-free. The replacement income, therefore, can be used to make the mortgage repayments, pay the rent, the utility bills or any other household expenses. In short, they can help to head off an otherwise inevitable spiral into unmanageable debt.
Income insurance offers a particularly sound way of tackling the most common reasons for the temporary interruption of a regular income. An accident or an illness, for example, can leave the victim needing several months off work in order to recover. Unless the employer operates an unusually generous sick-pay scheme, then the pay from work will sooner or later run dry. This is a fate that will strike immediately, of course, in the case of redundancy. In any of these circumstances, however, income insurance will ensure that there is a standby replacement income paid every month – generally for up to a year, if necessary – until the policy holder is well enough to return to work or has found a new job.
The typical maximum of 12 months payment of such a replacement income is usually enough to see policy holders back on their financial feet once again, but it is also a way for insurers to offer this sort of insurance at a surprisingly low cost in premiums. The maximum duration of such payouts naturally helps to limit the potential liability taken on and this can be reflected in the way in which premiums are calculated. For those looking for a looking period of comfort, however, some income insurance policies offer the option of extending the maximum payout period to up to 24 months, for which an additional premium is payable.
When it comes to determining the level of replacement income that will be necessary in the event of temporary incapacity or unemployment, the choice is very much up to the policy holder when setting up the insurance. The calculation is likely to take into account the cost of the monthly premiums (invariably quoted in terms of each £100 of income insured), the likely duration of the absence from regular employment, and the ongoing, regular financial commitments of the individual concerned. Whilst the individual is free to choose to receive benefits that will be used as an all-purpose, general source of income, to be spent exactly as the one from work, it is also possible to limit the cover to such essential bills such as the monthly mortgage repayments or those on any other borrowing or credit. At a stroke, therefore, the same insurance can be described as income insurance, mortgage insurance or loan insurance respectively. In any event, the maximum level of cover generally available will be up to a typical maximum equivalent to 50% of the policy holder’s normally earned income, or £1,500 a month, whichever is less.
There are also circumstances in which the usual package of risks covered by most income insurance policies can also be varied. Instead of a complete package covering accident, illnesses and unemployment, for example, it might be sensible – and will certainly be cheaper in terms of the premiums payable – to restrict cover against either unemployment or incapacity, rather than both. For example, the individual’s employer might run a perfectly acceptable and sufficient sick-pay scheme that would make further cover against incapacity unnecessary; alternatively, it could be that a particularly generous redundancy package has already been negotiated between the employer and employee representatives, so that further unemployment insurance is unnecessary and only the risk of incapacity has to be covered. Income insurance offers the flexibility to cope with any of these situations.
Some people might think that income insurance is only available for those earning above a certain amount each year or limited to those employed in particular professions. This is not the case and eligibility for this type of insurance is drawn very widely indeed. In fact, it is also available for the self-employed. All that needs to be demonstrated is that the proposed policy holder is currently working (and not off sick) at the time of the proposal for cover and has been regularly employed (or self-employed) for at least the previous six months. Residence must be in the UK, Channel Islands or Isle of Man and, of course, the policy holder needs to be available for work (and not retired, for example) throughout the insured term.
When cover is being sought against unemployment, there must be no redundancy notice already served or imminent and the self-employed subsequently claiming under the unemployment terms of the insurance will need to show that they have ceased trading altogether and not simply going through a “lean patch” in their business. No medical examination is generally required, although pre-existing medical conditions are likely to be excluded from any subsequent claims.
A recent innovation is the introduction to some income insurance that also covers time taken off work in order to provide full-time care for an immediate family member, thus removing the obstacle that most people would face in wanting to provide this sort of attention for a loved one in need. It works in just the same way and entertains claims in just the same manner as though the policy holder him or herself were incapacitated for normal work, with the same typical maximum of 12 monthly benefit payments up to the permitted maximum level of cover.
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