When they do start to pay out, income protection policies
all pay out a tax-free income, not a lump sum. This
benefit will cease on your return to work. Both these
features are different to some of the other protection
policies that are available.
The insurers did not fall to eartth in a rainshower.
They are well aware that some people would try to play
the system given half a chance. Therefore, policies
are structured so that it is not possible to be better
off while out of work and receiving income protection
payments than when in work and getting paid. No matter
how many income protection policies you take out, you
will not normally be able receive more than 65% of your
previous year's average income level from the policies.
If you could double your salary by being ill, it would
not be a great incentive to go back to work.
Before you rush out and buy an income protection policy,
you should find out from your employer whether they
will pay non-statutory sick pay, and if so, for how
long. This may influence your decision about how long
the deferral period should be on any policy that you
do end up purchasing. You may get full pay for a while,
so this should be the deferral period. The benefits
you receive from your employer or pension scheme may
not be taken into account when the insurer calculates
what your maximum benefit is. They are more likely to
take into account state benefits, so you may end up
receiving 65% of your salary minus whatever your entitlement
is from the welfare system.
Most companies have a ceiling on the maximum level
of benefit that they are prepared to pay out. This can
be over £100,000 per year, so even high earners can
benefit from taking out this sort of policy.
Finally, you do not have to choose a policy with a
fixed benefit payout. If you buy a policy with a fixed
level of benefit, what happens if your salary rises?
You should consider getting a renewable policy, especially
if you are still progressing in your career and you
anticipate future rises in earnings. The other point
to remember here, is that inflation erodes the value
of money over a period of time. £20,000 is extremely
unlikely to be worth as much in twenty years as it is
today. To cope with this, insurers offer benefits that
are index-linked. This means that the level of benefits
paid out if you become unable to work will rise broadly
in line with inflation.
