Income protection is arguably the most needed long-term protection product. After all, what do most of us rely on to maintain our lifestyle? A regular income. So, the sudden loss of that regular income is surely one of the biggest risks a client faces.
If your client’s income stopped today, what would they do? Do they have savings set aside, a second income, an employer-funded sick pay arrangement, or would they have to fall back on any government support they might be entitled to?
Income protection policies can provide a suitable replacement income for clients who find themselves unable to work due to an illness or an injury. Despite the importance of these products, they are often perceived as complicated and difficult to advise on because they work differently to other more common policies like life or critical illness insurance.
One of the best ways to demonstrate how they differ is to look at what happens when a claim is made.
Life insurance pays out if the life assured dies or is diagnosed with a terminal illness and has less than 12 months to live.
Critical illness policies require the life assured to meet the definition of a specific illness before any money is paid.
Income protection policies require the life assured to meet the insurer’s definition of ‘incapacitated,’ or in other words their inability to work because of an illness or injury. The most common ones are:
- Own occupation, which means the life assured will be able to claim if they are unable to carry out their own occupation. This is typically regarded as the best definition for clients as it is the easiest against which to make a claim.
- Any occupation means the life assured can only claim if they are unable to perform any occupation, not just the one they were doing before they were unable to work.
- Suited occupation means the life assured can only claim if they are unable to do an occupation that they would be suited to based on work experience, training, or education.
To assess whether someone meets the insurers definition of incapacitated insurers will gather the appropriate medical evidence to confirm the definition is met.
While insurers are gathering medical evidence, they will also be looking to ensure that the claim is financially valid. This means making sure the life assured has evidence to back-up the benefit payable under their policy.
Advisers can help to minimise the risk of a claim not paying out by ensuring clients regularly review their cover to ensure it is proportionate to their needs. Encouraging clients to be as open and honest during the application process can ensure they are paid out what they expect if they have to claim. Even more minor conditions can be important to disclose.
Throughout the following case studies, I will address three common income protection myths.
Myth 1: self-employed clients are difficult to cover
There is estimated to be 4.24mn self-employed people in the UK. That is 4.24mn people who do not have access to an employer-funded sick scheme or statutory sick pay.
Self-employed clients who are sole traders have liability for their ongoing costs, this might include their rent, utility bills or even vehicle rentals. They may not be able to pause some of these costs if they need to take time off work due to illness or injury.
Some insurers can provide flexibility to cover certain fixed costs self-employed clients pay to run their business.
Case study: Joe
Joe’s a self-employed builder and sole trader. His monthly fixed overheads are a total £1,341 per month (£16,092 a year) and include things like van hire purchase, rent for premises, and other business expenses needed to keep his business afloat. He has paid these costs for the past 12 months.
