Suddenly becoming too sick to work can be a short cut to financial disaster.
With Statutory Sick Pay currently at a paltry £81.60 per week, government support averages only 38 per cent of income if you become too ill to work.
Income protection insurance is something of a Cinderella market, but there are four main products that can insure you against a sudden loss of earning power.
PAYMENT PROTECTION INSURANCE (PPI)
Typically will meet repayments on your credit and store card, mortgage, or loans if you’re certified sick for a period of around 12 months.
PROS: It can buy you peace of mind for periods of short-term sickness, by ensuring your regular payments are maintained if you are unable to cover them from income.
CONS: PPI policies have come under fire for industry mis-selling, and particularly problematic is their stability for the self-employed.
INCOME PROTECTION INSURANCE (IPS)
Also known as permanent health insurance – IPS is designed to replace part of your lost earnings if you are unable to work because of illness or disability.
PROS: A top option for the self-employed, it provides a tax free monthly payment of between 50 and 60 per cent of your usual earnings. The payments only cease once you are back at work or reach retirement age.
CONS: Does not pay out until a ‘deferred’ period has elapsed – usually four weeks. Exclusions can be rife for pre-medical conditions, and common problems like stress and anxiety are specifically excluded.
ACCIDENT, SICKNESS, AND UNEMPLOYMENT COVER (ASU)
Will provide a monthly income if you are unable to work if off sick, have an accident, or are made redundant.
PROS: Suitable for employees with short-term accident or sickness repayment problems as policies rarely exceed one or two years’ duration at most. Covers mortgage repayments as well as regular bills.
CONS: There is usually a ‘deferred’ or ‘waiting’ period before payments start.
CRITICAL ILLNESS COVER (CIC)
Provides a financial safety net in the form of a tax-free lump sum if you are diagnosed with a serious illness.
PROS: Can pay the bills in the event of a long-term or terminal medical condition.
CONS: Pricy, and a minefield of exclusions. Take a trusted broker’s advice before buying.