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Short-term income protection policies are sometimes known as accident, sickness and unemployment products. Usually, they only pay out for one or two years. There are several different short-term policies. These include payment protection insurance and mortgage payment protection insurance. Both mean that you won’t default on any outstanding loans. You’ll also find short-term policies that pay out if you find yourself unable to work. By contrast, long-term protection will provide a regular, tax-free income if injury or illness means you’re unable to work for a longer period.
If you take out a long-term income protection policy, you’ll be protected against accident and sickness. If illness or injury leaves you unable to work, your policy will cover a set proportion of your income. Some policies allow you to claim more than once. That means if you’re ill, then recover, then fall ill again, you can still claim. And if you were to suffer a serious condition, like cancer or permanent disability, the policy would pay out until you retire, die or become well enough to work again. You won’t be alone: according to the Association of British Insurers, insurance providers pay out £13.9 million a day for income protection, critical illness and life assurance.
Most policies have a minimum term of five years and will go on until you reach 70. You might want a policy that lasts until you plan to retire – that way you’ll have earnings cover in place for the rest of your working life.
That depends on how much you earn and which premium you choose. In many cases you can insure a set percentage of your pre-tax earnings. This can be as high as 70% but could be lower if you’re a high earner. Think about how much you want to protect. As a minimum you’d want to cover your essential monthly outgoings – rent or mortgage payments, household bills and any debts – plus an allowance for everyday spending.
The deferred period is the time you’d have to wait before the policy kicks in and starts delivering. It makes sense to arrange for the policy to start paying out when your employee sick pay stops – you’ll need to check your contract, as this will vary between employers. It’s worth remembering that the longer the deferred period, the lower your premium will be.
Most long-term income protection policies are designed to cover accident and sickness, but some have an option to include short-term redundancy protection. The insurance market is very competitive, so it’s a good idea to compare policies and prices. Call the team at Assured Futures on 0808 141 1245 (Monday-Thursday 8.30am-7pm, Friday 8.30am-5pm and Saturday 8.30am-noon) and one of their advisors will be able to help you.