Would you be able to cope finanically if you lost your job or became seriously ill? What about your family? Neil Faulkner looks at five ways to protect your income.
Not many insurances simply pay you or your family money. Most will fix things for you, or give you your money back only after you've paid to fix things yourself.
However, there are five insurances that are different. Two are types of insurance that are designed to pay you an income when the conditions of the policy are met. The other three insurances are often sold in the same breath, but they are different fish in the same kettle.
In the following table, the top two are the insurances that protect your income. The next three are the other types of insurance that pay you money:
Five insurances that aren't necessarily all that similar
|
Type of insurance |
What does it do? |
|
Income protection insurance |
When you are unable to do your own job for health reasons, you can be paid 50%-65% of your salary tax free till your retirement date or till you recover. |
|
Income payment protection insurance |
When you're unable to work for health reasons or if you're made redundant, you can be paid up to 50% of your salary tax free for 12 months (or, rarely, 24). |
|
If you are diagnosed with specified illnesses, typically including strokes, MS, some types of cancer, and others, you can be paid a lump sum. |
|
|
A lump sum can be paid to your family, or to clear the mortgage, if you die young. (Typically aged 65 or earlier, but you specify the end age and pay premiums till then.) |
|
|
Family income benefit |
An income can be paid for a specified period of time to your family if you die young. (Perhaps till your children are 18 or your spouse reaches 65.) |
I'll share my opinion on each now, and point you in the direction of further information:
Income protection insurance
Of all the insurances above, you should consider the first one first - income protection insurance. Relative to most other insurances, its small print is usually an awful lot less tricky.
I believe most people (but not all) should get income protection insurance before paying for such things as home contents insurance, pet insurance, mobile-phone insurance, payment protection insurance, a second car, a new Nintendo Wii, and many other things. Nevertheless, most people don't have it. Not good, because you don't want to rely on the state, as this article explains.
A good combination to consider is income protection insurance to cover unemployment through health problems, and building up a decent savings pot to cover you in times of redundancy.
Income payment protection insurance
We've criticised payment protection insurance (PPI) for six years due to its high cost and lots of exclusions. However, if you buy PPI to protect your income you can still get it at a reasonable price if you shop around. It still has as many exclusions, but the price better reflects that with the cheapest providers. Therefore, so long as you understand what isn't covered, it can be suitable for you.
If you want some insurance against unemployment, this is really your only option (although one or two PPI policies will protect you from unemployment only, if you want). Read more about the exclusions in Is unemployment insurance up to scratch?
I suggest you also read more about the differences between income protection insurance and income payment protection insurance.
Critical-illness insurance
When you've read a few of these policies, you can see that this insurance also has a lot of exclusions and, although insurers have been adding to the number of conditions you can claim on, you should certainly not assume that everything you'd like is covered. You must also strictly meet all the conditions in order to be able to claim.
On the other hand, it brings valuable peace of mind and some readers have reported being very happy they bought it after they developed an illness.
You can read more about some of the issues you face in Protect your family from cancer. I would also compare prices from many providers, because we have good reasons to suspect it is often over-priced: 1) because it's quite aggressively sold and 2) because insurers make it unusually hard to find the important claims statistics.
Life insurance
It's a good product, but insurance consultants (salespeople) often have a different opinion from me of who actually needs it. Ask yourself: 'Will it benefit my family if I die? Do they actually need the money?' If it's just your mortgage lender or credit card provider that benefits, for example, you don't need it. We've covered various aspects of this insurance in recent weeks, so check out our archives.
To celebrate the launch of our new life insurance service, we’re offering £50 cashback when you arrange new cover with lovemoney.com.* Visit our life insurance centre for more details.
Family income benefit
Despite family income benefit being arguably as useful as life insurance, you don't hear about it much. To me, this is a good sign that it's probably less profitable for providers than many insurances, which means it's better value-for-money for you!
It is usually regarded as a budget form of life insurance. Your family will get an income instead of a lump sum. That is not only cheaper, but it may also be easier to manage.
Please!
- That was just a short summary of the five products to get you started and to outline the differences. You should read the articles I linked to for more information and otherwise do your own research.
- The small print for each policy can be significantly different, so be sure you know what you're buying: read it.
- Check the benefits your employer provides, such as sick pay and insurances, before buying anything.
> Compare life insurance and critical-illness insurance through lovemoney.com
> Read Private medical insurance: is it worth it?
*Until 12 June 2009.