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Protect your income

30th September 2009 Print
Here are the top 5 tips that consumers should bear in mind when buying a policy to protect their income, according to Protection Specialists LifeSearch.

Most consumers have heard of Life Insurance and know how to financially protect their dependants against the death of the breadwinner. However, relatively few know how to protect their income against illness or disability preventing them from working - something that is far more likely to occur.

The protection market can be very complicated to even the most experienced customer. Income Protection (IP) is the best, but also one of the more complex, products out there. Due to the current financial turmoil more people are becoming concerned about financially protecting their income and lifestyle, so LifeSearch have put together 5 top tips on how to pick through all the options.

1. Don't rely on the state to help

Many consumers think the government will be there to catch them if poor health strikes, they are incapacitated and are too ill to work. In fact the levels of benefits offered by the government are far too small to maintain the average standard of living and are designed to be only a very basic safety net. Consumers need to ensure they have other plans in place, ideally Income Protection.

2. Don't confuse IP with MPPI (Mortgage Payment Protection Insurance, also known as ASU).

In comparison with Income Protection policies, MPPI plans can be greatly inferior and may even cost you more. Typically speaking MPPI plans only pay out for one year, include a number of important exclusions and both the premiums and the conditions of the policy can be changed at short notice.

3. Check the IP occupation class

Perhaps bar the premium, the occupation class is the most important part of an income protection policy as this is what the insurer uses to decide whether or not to pay your claim. A range of different definitions are available, however, the most comprehensive are known as ‘Own Occupation' or ‘Suited Occupation' with ‘Any Occupation' being the least advised purchase. Own occupation means you can make a claim if you are unable to perform your own job. Being covered under Any Occupation means that you have to be unable to perform any job, this can include working from home stuffing envelopes, or stacking shelves at the supermarket, equivalent earnings to the job were doing before are not taken into account. If your policy states anything other than ‘own' or ‘suited' occupation you should seek independent advice.

4. Check what other benefits you are entitled to

It is vital to know the other benefits you are entitled to, as these will affect the amount that any insurance policy pays out. Do you know how much the state and how much your employer will pay you, and how long for? The longer you are paid for sickness through your employer the longer your deferment period should be, which reduces the cost of your premiums.

5. Guaranteed rates

Your premiums might seem cheap today but will they stay that way? A guaranteed rate gives you the peace of mind that no matter what happens throughout the term of your policy the price will remain the same, even if you make a claim and return to work, your policy will carry on at the same price as before. If you choose reviewable rates, be aware that even though they start off cheap you have no idea how expensive they could become in the future.

Matt Morris, LifeSearch Policy Adviser, says, "Almost everyone needs some form of protection and for many, their income is the most valuable asset they have. State Benefits are a very basic safety net and only really support those on low incomes.

"For most of us, the nightmare scenario must be discovering that not only have we been diagnosed with a long term illness, but the realisation that income is going to dry up in a few weeks as well. Peace of mind is a few pounds a week spent on a good income protection policy."