Alternatives to income protection

Mr Grant says Employment and Support Allowance (ESA) requires undergoing a work capability assessment and provides a limited benefit of about £70 to £100 a week.

He says this will not suit everyone so others may prefer to rely on savings or borrowing from friends or family.

Mr Grant says: “The main problem is that a sustained period of incapacity would most likely strain relationships and finances and may well cause more emotional and financial problems and a good deal of stress.”

Another perceived alternative is critical illness cover.

In reality, Kevin Russ, technical manager of Friends Life Individual Protection, says critical illness cover is no alternative to income protection as it would not pay out if your client is only unable to work.

He says: “That could be as a result of a back injury or mental disorder such as stress or depression, which would not be covered by a critical illness policy unless they were incredibly severe.

“In addition to this income protection could pay out much more than a critical illness policy. If you had a client aged 24 earning £25,000 per year they would be able to get £14,500 per year of cover from Friends Life for £13.58 per month with a six month deferred period until the age of 65.

“If they were to make a claim shortly after starting the policy over the next forty years the plan could pay out £580,000.

“A standalone level critical illness plan for the same amount could cost £114.49 per month. Even if the critical illness plan was written as a family income benefit plan it would still cost £51.93 per month.

“In fact for the same monthly premium as the income protection plan the client would be able to get £65,667 of level critical illness, which would fall a long way short of the £580,000 that would be paid out by the income protection policy.”

Life insurance and critical illness should be viewed as compliments to income protection rather than alternatives as they wouldn’t pay out for the same conditions, agrees Martin Sincup, income protection manager of LV.

But Mr Sincup says he knows that life cover sales far outstrip those of any other form of protection. He says this is due, in part, to the fact that it is the most well-known of all the protection products on the market.

Mr Sincup says: “Taking out life insurance ensures a client has peace of mind that they will be protected alongside their dependents.

“The conclusion must be that many would be financially vulnerable if they were unable to work for an extended period and therefore income protection should be at the cornerstone of most people’s financial planning.”

Accident, sickness and unemployment (ASU) cover is also an alternative to income protection and it does include a benefit for individuals who find themselves unemployed.

However, Julie Higman, income protection product manager of Aviva, says often an ASU policy will only pay benefits for 12 months.

Peter Hamilton, head of retail propositions at Zurich, says another option available to advisers and customers is the mortgage payment protection insurance (MPPI) product, which provides cover specifically against the monthly mortgage repayment amount.

If a claim is successful, Mr Hamilton says payments will typically be limited to one year, so one of the key concerns here compared to full income protection is what will happen at the end of the year, and how other income needs will be met.

On the other hand, unlike full income protection, Mr Hamilton notes MPPI plans will pay out for unemployment (within certain rules) and there are plans available on an unemployment only basis that can act as a gap fill alongside full income protection.