Income Protection Insurance

Up until now, employees in the Public Sector have largely escaped the ravages of the recession. Although budget cuts have already begun to bite in respect of Defence related jobs. Many insurers are now turning down applications from staff in Defence jobs and also those employed by several Councils implementing staff cut backs. It is probably the last chance for the remainder of the Public Sector to buy this cover before the Underwriters take the view that they are simply to high risk to cover. Here are the top ten tips for Civil Servants, Local Authority and Health Service employees seeking Income Protection Insurance to protect their families, their income and their lifestyle.

1. Why take out this cover?
State benefits are pitiful compared to the real cost of living for the average family or young couple living in the UK today. When denied their ability to earn a living wage by accident, sickness or unemployment, people need money to fall back on. The fortunate have savings, however the majority will find themselves in real trouble financially within a matter of weeks. Research published in 2008 established that the most people of working age have less than 2 months wages saved, with 25% reported to have nothing at all. Therefore, for the majority of Public Sector employees, having an insurance policy that covers all of their important bills whilst they are out of work, makes a great deal of sense.

2. When to apply for Income Protection or Mortgage Protection Insurance
For anyone employed full time (at least 16 hours per week) in the Public Sector and where there are not any reports of any impending threats to jobs, it would be prudent to consider getting a quote right now. If an employer has made an announcement regarding cut backs, or plans major layoffs, it is probably too late to buy this cover. The recession endangers different sectors and the jobs of those employed within those sectors, at different times. Up until now, employees in the Public Sector have largely escaped the ravages of the recession. Although budget cuts have already begun to bite in respect of Defence related jobs. Many insurers are now turning down applications from staff in Defence jobs and also those employed by several Councils implementing staff cut backs. It is probably the last chance for the remainder of the Public Sector to buy this cover. Do so before Underwriters say 'no thanks' to all Civil Servants and Local Authority workers. Even those who already have this cover, perhaps just covering a mortgage or a single loan, should check if this is enough. Particularly couples, where one is employed by a Local Authority. If they are the main wage earner it could be prudent to take out additional low cost cover with an on-line provider whilst they still can.

3. Know what to buy
Mortgage Payment Protection Insurance (MPPI) - is designed to cover monthly mortgage payments and can usually be increased by up to 25% to contribute toward other household expenses. Income Protection Insurance (often called Lifestyle Protection) - is very similar to MPPI, however it is designed to replace the bulk of net income if the policyholder is unable to work. It is more accurate to describe this as a short term income protection insurance, as it will pay for up to a year. It is not limited to mortgage repayments. However many providers cap their maximum monthly benefits at £1500, some £2000. It is rarely more because the Underwriters make the assumption this would be enough for most people to pay their monthly bills. Critical Illness or long term Income Protection Insurance - Critical Illness and other long term Income Protection policies are usually sold by Life Insurance companies and require long forms to be completed, often accompanied by medical evidence. These policies do not cover redundancy or unemployment. With individual underwriting and a commitment to give cover up until retirement age, these are understandably far more expensive. They are mainly bought by those who fear long term disablement and buyers often select long excess periods before benefits commence. Payment Protection Insurance (PPI) - none of the above should be confused with Payment Protection Insurance that is often sold alongside loans or linked to credit card debt. Payment Protection has gained a very bad reputation for offering poor value for money. Consequently, many people are now replacing it with Income / Lifestyle Protection insurance bought on-line at a fraction of the cost.

4. How to calculate cover required
Mortgage Payment Protection it is a very simple calculation: Average monthly cost of mortgage repayments: £700 plus (up to max) 25% for additional expenses: £175 = £875 benefit required. However, for many people, this is simply not enough and they should consider an Income Protection or Lifestyle Protection Policy. Calculating Income/Lifestyle Protection monthly benefits, example:

5. Choosing the right cover
These policies will cover people who are off work due to Accident and Sickness or Unemployment for up to a year. Most may only be interested in Unemployment cover in the mistaken belief Accident or Sickness benefit is not important for them. However there are relatively few providers of unemployment only cover and frequently others will provide the full Accident Sickness and Unemployment cover for less! More importantly with 2.4m people in the UK claiming Disability Benefit (Dept of Work and Pensions 2008) the risk of health related claims is greater than many think.

6. Save premium with an excess period
The longer the excess period, (that is the time the individual can afford to wait before the policy benefits are paid), the cheaper the policy will be. Some insurers refer to this as the deferment period. The excess period chosen are best matched to the terms of an individuals contract of employment and particularly their sick pay scheme. For example some can take 6 months off work on full or half pay. Therefore it is worthwhile for them to take an excess of at least 90 days in respect of accident or sickness. Conversely, for unemployment benefits, the same person may only want a 30 day excess in the event of redundancy.

7. Best Prices
The best rates are available on line where Income Protection and Lifestyle Protection Insurance can be bought without the expense of telephone sales or high commission to inflate the price. Anyone who already holds a monthly paid Payment Protection Insurance, perhaps linked to their mortgage or a personal loan, will almost certainly find huge savings by switching their cover to an internet provider. However, in the current economic climate, never cancel an existing Mortgage or Income Protection policy until accepted in writing for a replacement or alternative policy. This is because underwriters have significantly changed their acceptance criteria with the UK economy in recession. Moneysupermarket are a good source of comparison quotes, however the summary of cover should always be read very carefully to ensure the cover really is like for like. The FSA have a web based comparison service, is entirely independent and not trying to sell anything. Their tables also include quality measures. As a result, though not easy to use, they represent a good place to research a shortlist of suppliers to compare quality as well as price.

8. What happens if an application is not accepted on-line or advice is required?
Applying for Income Protection, Mortgage Protection or Payment Protection Insurance on-line is a great way to save money. However it is not for everyone. The acceptance criteria applied by different underwriters varies. If applying on-line does not work out, it may simply mean the applicant is one of many who need advice regarding what to buy. This is where the specialist broker or Independent Financial Adviser can add value to their clients. Ultimately the cost this advice will be reflected in the price paid.

9. If individual circumstances change
A new job with new terms and conditions could change the benefits required, It is essential to tell your Protection Insurance provider if you change your job so they understand your situation, even if the benefits required remains unchanged.

10. The assurance of dealing with a bona fide provider and underwriter
Look for providers registered with the FSA, this means they are regulated, closely monitored and the underwriters must meet strict rules concerning their solvency to be allowed to trade in the United Kingdom. Regulation is thorough and the FSA can impose huge fines or simply close an organisation that does not comply with their standards