If your family is anything like ours here at GreenSky, you’ve probably had similar financial advice dished out to you over the years. Something about a pension, something about the dangers of credit cards, and some kind of sage advice about saving for a rainy day – with various percentages attached to that last recommendation.
Well, whether you’ve followed that advice over the years or not, that rainy day fund has all sorts of different names now. ‘Emergency fund’ tends to be the moniker that most people go with. The question then is what is an emergency in the financial sense, and how much should you have? Roof caves in? Emergency. Have to pay for an operation? Emergency. Can’t work due to illness? Emergency.
A quick search on the internet about your emergency fund suggests anywhere between a few months and a year’s (at the extreme) salary in the pot. Let’s imagine that you are too sick to work for a while, but you have three months-worth of salary in your emergency fund. That means you’ve got three months grace to get better or figure out your next move. But, what if three months isn’t enough? Well, these days there is another way, which might work better for you than a rainy day fund. Enter, Income Protection Insurance.
What is Income Protection Insurance?
It’s an insurance policy that covers you should you find yourself unable to work due to injury or illness. It normally pays out until you return to work, retire, or until your death. That said, there are short term policies that don’t cover that length of time and would therefore work out cheaper.
Now, some of you out there might be thinking that you would be fine money-wise should you be unable to work through illness – your sick pay from work will cover it. Well, that may be the case, but it’s worth checking your sick pay policy to see how much you would get and for how long, and then seeing how that compares against your expenses. Income Protection Insurance could help cover the difference, and if you’re unable to work for the long term, your Income Protection could kick in after your sick pay ends. If you’re self-employed or a contractor, this type of insurance could well be crucial.
What do you need to know about Income Protection Insurance?
As with most types of insurance, there are a lot of different things to consider. For example, the payments from this type of policy are usually calculated on a percentage of your earnings. Payments, which are tax-free, usually come once a pre-agreed period has expired. Of course, the longer you delay the start of the payments, the lower your monthly premiums. Another advantage is that you can claim as many times as you need to while the policy is valid.
When you’re choosing a policy, you need to know exactly what type of plan you’re buying. In general, there are two main types – ‘own occupation’ and ‘working tasks’. If you’re a personal trainer at a gym, break your arm, and have an ‘own occupation’ policy, you’re likely to get a payout if you’re prevented from doing any aspect of your job. If you had a ‘working tasks’ policy, however, you might find that you may not get a payout on the ground that you can still carry out pre-defined ‘working tasks’.
Is it expensive?
Short answer? That depends. Obviously, you can choose the level of cover you need, so if you have lower monthly expenses, you’ll need a less-expensive policy. You could also reduce your premiums by deferring the start of your payments for a longer period.
The cost of policy will also depend on a multitude of factors such as your current health, your age, if you’re a smoker, and the type of job that you do.
So do you need Income Protection Insurance?
Maybe. There are plenty of alternative strategies for you to consider. You might decide that your sick pay is security enough. You might have savings that, when combined with your sick pay, will extend that period of security even further.
Another option might be combining your savings with an Income Protection Policy that has a lengthy deferral period, meaning that short-term health problems wouldn’t trigger a claim, but you’re covered against a potential long-term issue that might have a serious effect on your earning ability.
There are a lot of different options, but in short, if your financial security or lifestyle are likely to be seriously impacted if you are unable to work, then Income Protection Insurance is something to consider.
This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.
GreenSky Wealth Limited is authorised and regulated by the Financial Conduct Authority. FCA No. 629624. Registered Office as above. Registered in England and Wales, Company No. 07103441.