Income Protection, also known as Permanent Health Insurance

Income Protection is designed to provide a tax free income should you be unable to work due to illness.

Policies are arranged on a single life basis and occupation, age, sex and deferred period are the most influential factors in determining the cost. Deferred period relates to a period of time that must elapse before benefits can commence payment.

Benefits are usually capped at 50% of earnings. two type of inflation protection can be included; the first increases the level of cover automatically by inflation each year and the premium payable will rise to reflect the increased level of cover. the second ensures that benefits in payment increase by inflation. Both options come at an additional cost.

Income protection policies have no surrender value unless the policy has an investment content, very few have this feature.

Occupations are banded, usually into 4 or 5 groups. Administrative jobs fall into the lowest category and benefit from the lowest premiums. Manual jobs are considered more risky and likely to result in a claim so will fall into a higher category resulting in a higher premium. Some occupations are considered too risky and insurance may be declined (people working at height or in dangerous situations, e.g. underwater).

Deferred periods can range from 1 to 24 months. A shorter deferred period results in a higher premium as it is considered more likely that a claim may arise from a short lived illness. A deferred period of 6 months means that an illness must last 6 months before benefits can commence. Deferred periods should be considered in conjunction with other benefits you may have, for example your employer may pay sick pay for up to 3 months in which case you would select a minimum deferred period of 3 months as benefits must not overlap other policies and result in you receiving more income than you would have received if fully fit. While not widely available, it is possible to arrange a deferred period of just one day with one particular insurer.

The maximum level of cover is usually 50% of your pre-disability earnings, although may be as high as 60% with some insurers. Since the benefit is paid tax free and you are likely to receive some form of incapacity benefit from the state, this level of income is almost sufficient to equal your net employed earnings.

Benefits will stop when you make a recovery and return to work. If the same illness reoccurs then you it is common for the deferred period to be waived as the illness is considered to be a continuation of the earlier illness.