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How are you protecting your income?
Too many people think the state or their employer will pay out if they become ill, but the truth is we need to protect our incomes.
by Michelle McGagh on Sep 18, 2012 at 14:51
How would you pay your mortgage if you fell ill and couldn’t work? Many people believe the state or their employer will look after them, but the reality is far tougher.
Income protection is a little known and little understood form of insurance that could protect your family if you become unable to work. Just one in 10 private sector workers in the UK has it, according to the Association of British Insurers. John Bridge, director of sales for mutual Cirencester Friendly, said there is resistance against insuring income.
‘People are five times more likely to insure their pet than their income,’ he said. ‘It is indicative of how people think about their animals, but also that they do not think that insuring their income is important.’
He said the main problem in encouraging workers to purchase income protection is that many believe if they fall ill they will be looked after by the state or by their employer.
Don’t rely on the state
If you become ill and can no longer work, the benefits you receive will do little to help – particularly if you have a mortgage. Bridge said those who are too ill to work may qualify for housing benefit, but that only pays out after a waiting period of up to 39 weeks.
‘If you do qualify you will receive notional interest payments – which is what the state thinks you should be paying in interest, not what you are paying,’ he said. ‘If the benefit is less than what you are paying in interest you need to make up the difference, and if it is more it is cut back. [The state] does not pay off the capital on your mortgage, only the interest – plus you may have months of arrears backed up.’
Your employer isn’t going to be much help either in the event that you are unable to work. Although they may pay a full salary for a period of time, after that you are only entitled to statutory sick pay, which currently stands at £85.85 per week.
‘There is very little protection in case you are ill,’ Bridge said. ‘Many employers will pay for you for a certain period – for instance teachers get six months’ pay – but not many people enjoy that length of time.’
Picking a policy
When choosing an income protection policy, you will need to check the small print to ensure that the coverage it offers is right for you.
Pricing is particularly important when picking insurance, and many people use comparison websites to pick the cheapest option, which Bridge said is a ‘danger’. However, he also said that just because a policy has higher premiums it does not necessarily mean it offers superior cover.
‘When you buy a motor car you know that the more you spend, the better the car, but that is not necessarily the case with insurance,’ he said. ‘We are a mutual organisation that is owned by our members, but other insurers are owned by equity backers often have higher premiums but that does not mean better cover, they have to satisfy shareholders.’
He added that some companies also increase income protection premiums to subsidise more popular types of insurance.
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