Wage Replacement Insurance
Income protection insurance or wage replacement insurance is an insurance policy that pays you a monthly income in the event the insured person is unable to work due to an accident or illness. It is designed to replace your lost income so you can maintain your bills and expenses allowing you to concentrate on getting better.
Whilst it is always recommended, it is not a mandatory insurance. In some circumstances, it may not even be needed, so we always advise you to speak to an insurance expert like The Mortgage Pride to help establish if this insurance is needed in your individual circumstances and ensure the most suitable policy is arranged for your needs.
Choosing an Income Protection Policy
Every policy is different so choosing the right one for your own circumstances is important. You don’t even need a mortgage in order to protect your income. It can be taken out to protect your rent (known as rent protection cover).
When choosing income protection, you need to consider the reason you are taking out the cover. For example, are you taking it out to cover just your mortgage or rent if an accident or illness stops you from working or are you taking it out to help cover all your monthly bills and maintain your family’s lifestyle?
This will help you to determine how much you want to be covered for. It is important to note here that no policy is ever going to replace your income 100%. All insurance providers allow you to cover a maximum proportion of your income based on your income at the time of application.
If you are covering your monthly mortgage payment for example, then it could be you choose a term that matches the number of years your mortgage is going to run for. Or you may want to choose the policy to run until your anticipated retirement age for greater peace of mind.
How Long Would I Need to Receive a Monthly Income For?
The duration of receiving a monthly income from the policy in the event that you are unable to work long-term is known as the benefit period or term. There are providers who offer the following benefit periods:
- Limited benefit periods of 1, 2 or 5 years – this option means that you would receive the replaced monthly income for a maximum of 1, 2 or 5 years but if you are still unable to return to work after your limited benefit period, your replaced income would stop.
- Full benefit period – this option means you would receive the replaced monthly income amount until the end of your policy (possibly your anticipated retirement age) or until you are able to return to work.
So you have decided how long you want to be covered for, how much you want to be covered for and the type of policy you need. Now you need to consider the type of monthly premiums you want.
What Monthly Premiums options do I have?
Many policies will offer you two types of premiums:
- Guaranteed – this is where your monthly premium will not change for the life of the policy providing no changes are made to the policy.
- Reviewable – this is where your policy will be reviewed at key times during the policy (for example every 5 years) and the cost of your monthly premium will be adjusted upon review so it could go up or down.
There is also something called ‘age-costed’ or ‘age-banded’ premiums which may or may not be guaranteed. This means the cost of your policy increases each year as you get older. This may be by a set amount outlined to you at the start of the policy (this is guaranteed age-costed) or an amount unknown at the start of the policy.
How Long Does it Take Before I Start Receiving My Monthly Income?
The waiting period is known as the ‘deferred period.’ You may receive enhanced sick pay from your employer for a period of time meaning you do not need your policy to start paying you until your sick pay entitlement stops or reduces. Or you may be self-employed, have no sick pay entitlement from your employer or have no emergency funds in savings meaning you need the policy to start paying you immediately. It is important to ensure the policy starts paying you when you need it, to ensure any financial distress is reduced for you and your family.
What Else Do I Need to Consider?
Finally, you need to decide if you want your policy to be linked to inflation. The benefit of this is that your monthly benefit amount paid to you under the policy in the event of a successful claim would increase each year in line with the Retail Price Index (RPI) to protect you against future increases in the cost of living.
If you want peace of mind that your income protection is suitable for your individual needs, we recommend using experts like us at The Mortgage Pride.
We have access to a wide number of insurance providers offering protection cover and individual, jargon–free protection advice tailored to your budget. We can also review existing policies for you as well, to give you the peace of mind that your current income protection or wage replacement policy remains suitable for your needs.
If you are still undecided, take a look at Laura’s story where she explains the impact not taking income protection had on her family when she fell ill with a life-long health condition in 2017.
*Your home may be repossessed if you do not keep up repayments on your mortgage. You may have to pay an early repayment charge to your existing lender if you remortgage early.