Formerly known as Permanent health insurance (PHI), Income Protection Insurance (IPI) is an insurance policy which is principally available in the United Kingdom, Ireland, Australia, New Zealand and South Africa (more information about income protection). It is an insurance policy which pays benefits to policyholders who are incapacitated and therefore unable to work due to illness or injury caused by an accident.
Income Protection Insurance normally pays out until retirement, death or your return to work. However, you can get a short-term income protection insurance plan which is available at a lower-cost, but does not cover you for life. A short-term income protection insurance plan is best for those who will only be out of work because of a brief illness or a temporary injury that needs some time to heal, but is not fully life changing.
Neither long term income insurance protection or short-term income insurance protection will pay out if you are unfortunately made redundant. Nevertheless, they will often provide you with a kind of ‘back to work’ help if you are off sick for any reason.
There is also a degree of crossover between IPI and Critical Illness Insurance and this should be discussed with your financial adviser or broker prior to arranging a policy and any subsequently required pay-out.
It is only a minority of employers which support their staff for more than a year if they are off with illness or injury from work. Everyone of working age should at least consider income protection insurance, given the low level of state benefits available. However, a recent survey by Legal and General has suggested that only 9% of the public who are employed have some form of income insurance protection. Comparing this with the 4% of people who are in work claiming they have a life insurance policy of some description and 16% of people who said they have private medical insurance, 9% is extremely small.
Income protection insurance acts as a regular replacement income if you are unable to because of ill health or injury. Usually, with income protection insurance, the policy pays out after you have been off work for around 6 months (after what is known as a deferred or waiting position). You will usually receive up to 80% of your normal salary until you return to work, reach retirement age or die – however, this is dependent on the terms and conditions of the policy.
The policy might include paying out if you can return to work, but on a reduced basis meaning you will earn less than you did previous to your illness or injury. However, what they pay out will be a reduced amount that takes your drop in your salary into account.
It is important to understand in a broad sense what IPI offers and what precludes applicants and those currently paying into a scheme from receiving a pay-out:
There is also the option of group income protection insurance, the differences between Group income protection insurance and traditional income protection insurance are the product features and that IPI is for individuals and GIP is not.