What is Income Protection Insurance?
This guide covers the basics about Income Protection, including:
Income Protection is an insurance policy that pays a regular replacement income to someone who can’t work due to illness or injury.
It’s had various names over the years, including Permanent Health Insurance (PHI). However, it’s exactly the same thing.
There are two main types of cover:
Income Protection pays a benefit worth a percentage of a covered individual’s gross/pre-tax earnings if illness or injury stops them working.
There’s a waiting period between someone becoming unable to work and the policy paying out (the ‘deferred period’). A common deferred period is 6 months, but individuals (for individual cover) or employers (for GIP) can choose a different period when the policy is set up to suit them in set increments from around 8 weeks to 52 weeks.
After the deferred period, if the person still can’t work, the policy starts paying out until the covered person:
Most policies offer a transition benefit if an individual isn’t quite well enough to return to work full-time or to a role where they were earning what they were previously. For instance, the policy might pay 50% of the insured benefit if a person can only return to work on a part-time basis and faces a 50% loss of earnings as a result.
Income Protection covers illnesses, injuries and incapacities that prevent someone working.
Coverage varies based on the policy’s definition of incapacity. These are different thresholds that determine how your incapacity affects the type of work you can do. For example, the ‘own occupation’ definition of incapacity covers you for illness or injury that prevents you doing your specific occupation. Meanwhile, the ‘any occupation’ definition of incapacity requires you to be ill or injured to the degree you cannot perform any job.
Does Income Protection cover pre-existing conditions?
Pre-existing conditions are anything someone has in their medical history before an Income Protection policy begins covering them. Coverage of pre-existing conditions differs between Group Income Protection and individual Income Protection.
For GIP, most covered employees won’t need medical underwriting unless their insured benefit is above a threshold called the free cover level. The free cover level is the maximum amount of cover an insurer will offer a person before they require a medical underwriting assessment, which looks at their health and lifestyle.
The free cover level means that Group Income Protection typically pays a benefit up to this threshold for almost any illness/injury someone might suffer. As the individual has not needed to go through medical underwriting, this is usually true even if it’s a condition they person has suffered before. However, GIP may have exclusions on pre-existing conditions for the proportion of the benefit over the free cover level.
Individual Income Protection, on the other hand, almost always requires medical underwriting. Insurers examine applicants’ medical histories to decide illnesses/injuries the policy won’t cover based on lifestyle risk factors and whether they’ve experienced that or a similar condition previously.
Does Income Protection cover redundancy?
No. Although it’s a common misconception, Income Protection does not cover redundancy. It solely provides replacement income to people unable to work through illness or injury.
Isn’t this the same cover mis-sold a few years ago?
No. That was Payment Protection Insurance (PPI), which banks and other financial institutions often mis-sold to customers to protect loan payments in case of short-term illness or redundancy. The borrower sometimes didn’t need PPI, or it was unsuitable for them — or they simply didn’t know they were paying for it at all.
Yet whilst PPI and the alternative acronym for Income Protection, PHI, are similar (which doesn’t help with the confusion) they’re entirely separate.
Income Protection pays a replacement income based on a percentage of a covered individual’s earnings. PPI, on the other hand, generally only protected credit repayments. This is typically a far lower sum than replacing a percentage of someone’s entire income.
Whilst there are many similarities between GIP and individual, there are also key differences:
GIP providers often make added-value services available to employers and employees, typically at no additional cost to the employer. These can include:
In a perfect world, no one would become so ill they’re unable to work. Illnesses and injuries can have a big impact on mental, physical or — even with Income Protection — potentially financial health.
However, the reality is that people do become ill or injured. That’s why some GIP policies offer vocational rehabilitation to support people back to good health or prevent an employee’s condition deteriorating to the point they need to take time off sick.
Vocational rehabilitation specialists are typically qualified in areas such as nursing, psychology, physiotherapy, occupational therapy and more to support employees as soon as problems emerge – not just during a claim.
Employers can refer to vocational rehabilitation specialists at any time, whether it’s when someone is at work but struggling with their condition or if an employee has just gone off sick, long before a need to claim may arise.
Absence management services might use vocational rehabilitation specialists to help employers not just prevent absences but also offer support if an employee does become too ill to work.
This might include a dedicated helpline for sickness absence or wellbeing queries or support through the claims process. It can also involve helping create a return-to-work plan with the employer and the employee to discuss the best way to support employees back to work where possible. This may be on a gradual basis initially through a graduated return to work plan.
Many GIP policy providers offer employees access to an employee assistance programme (EAP).
This might include services for employees to access online, via an app or over the phone to support them with a variety of health, life, money and wellbeing concerns. Some EAPs even offer perks and savings such as cashback or discounts from major retailers.
As well as an EAP, sometimes GIP providers offer employees access to services such as:
At Unum, GIP customers can access these services and more via our award-winning health and wellbeing app Help@hand.1Find out more about Help@hand
1 Help@hand is provided to Unum Group customers by Square Health. It offers access to services designed to manage the health and wellbeing of employees and their families. Help@hand is entirely separate from any Unum insurance policy. Help@hand is not part of the insurance contract, is provided by Unum for no additional cost to its customers, and Unum can withdraw or change the service in the future. Help@hand is available to UK residents only. Unum offers access to the Help@hand services provided by third parties.
Square Health Limited, registered in England and Wales Number 07054181. Crown House, William Street, Windsor SL4 1AT.
Again, there’s a difference between individual cover and GIP.
Group Income Protection
Employers arrange GIP and offer it as an employee benefit. It’s not something individuals can buy themselves.
Insurers don’t usually sell GIP direct to employers, requiring an insurance broker or independent financial adviser (IFA). The broker’s job is to advise on the setup and design of your GIP policy to ensure it meets your needs, available budget and strategic objectives. The IFA can also provide advice on relevant market and legislative issues to consider.
The decisions the adviser will help you as a business make include:
The above all impact premiums.
Individual Income Protection
For individuals, a broker or an IFA is the most common route to purchasing cover. Whilst, in some instances, insurers may sell you cover directly, it’s usually beneficial to discuss your needs with an adviser so they can look at the market to find the right cover for you.
There are various websites you can use to search for an IFA — one example is Unbiased.
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