Income Protection (PHI)

Income protection, or permanent health insurance to give it it's more technical term is an insurance policy which protects your income, if you are unable to work due to accident or illness.
The Income Protection Policy aims to replace your income in the event that you are unable to carry on the duties of your role (through illness or accident), either until your retirement date or you are able to return to work.

In many ways Income Protection is a very important cover, protecting the golden goose, and ensuring that, should we be unable to work through ill health, we not just afford our mortgage but also our groceries and maintain our normal standard of living.

Income protection differs from Critical Illness, in that it is not limited to a certain number of illnesses or conditions. The basic premise is that if you are unable to work, the policy would pay out an income, until you are either able to return to work or reach the end of the term of the policy - usually your chosen retirement age.

What else do you need to know:

Deferred period:
this is the period you need to wait before the policy starts paying/ replacing your income. Clearly the longer the period you have to wait for the payments to start, the cheaper the policy is likely to be. How long you set the deferred period to be be will depend on a number of factors, such as how long your employer continues to pay you or how much you have in savings.

There are usually a number of clever features on Income Protection and a number of things that make it quite unusual.

Income Protection is a multi claim policy, i.e. You can make more than one claim (one at a time). You can make make a claim in one year, then find that you need to make another next year, unlike car insurance this should not affect the premiums either* e.g. You have a car accident and cannot drive, which is necessary for your work. You wait your deferred period, then the policy starts to pay out, a few months later you're back at work so the policy ceases to pay you an income. 7 months down the line you unfortunately slip over in the snow, and damage your back, after the deferred period your policy starts to pay you an income again. There is no limit to the number of times this scenario can happen, and the policy can not be cancelled by the issuing company, and provided you have chosen guaranteed premiums, the cost of the policy cannot increase either.

The policy cannot be cancelled by the issuing company (unless you make fraudulent claims) i.e. If you become a higher risk, because you have made many claims, the issuing company may not want to continue your insurance. As per a car insurance company, you’ve had so many cars stolen or so many accidents, no insurer is prepared to offer continued cover. However, with a guaranteed product the provider cannot cancel the cover, no matter the increased risk to them.

Rehabilitation benefit:
Most good policies offer this feature. Imagine that you have been off work for some time, and that you were in a higher management position before your illness prevented you from performing the tasks associated with that role. You are however, quite capable of some limited work, not what you once did but something. However, as is often the case, these more limited positions offer significantly less earnings. Rehabilitation benefit enables you to return to work in a lesser capacity or a different role (on medical grounds) and tops up the income you receive to that of the benefit level you had insurance for, i.e. You insured £35,000 per annum, and took on a part time position (as advised by your doctor) and only received £10,000 per annum (part time), the insurance company would make this up to the full £35,000.

Income Protection - tax free:
The income paid by the insurance companies is tax free - provided the cover is paid for personally. Therefore, although most insurance companies will only ever insure up to 50% of your income, when you consider the tax you usually pay each month, the maximum income they pay out is not that dissimilar to your normal net income.

The most common reason people fall into bad debt is through ill health. Permanent Health Insurance offers a cost effective protection against losing our income through illness.

Income protection is NOT a payment protection insurance or PPI.

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