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Income protection and types of cover available

This article is part of
Guide to Income Protection

Income protection typically provides a monthly benefit for a client if they are unable to work due to incapacity caused by illness or injury.

Martin Noone, distribution director for retail protection at Legal & General, says an adviser’s clients can use this benefit in any way they like – from helping towards paying their mortgage, household bills or covering medical care, to simply helping to maintain their lifestyle.

The benefit is paid until they recover and can return to work, or until they no longer qualify. Cover is provided for the duration of the pre-selected term irrespective of how many claims are made.

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Income protection policies can also cover, subject to a maximum benefit, individuals not in paid work.

According to insurance brokerage, income protection can be broadly divided into long-term policies, which usually up to retirement, and short-term income protection policies, which will generally pay out for 12 months.

It says: “Long-term income protection cover will provide your client with a regular tax-free income if they are unable to work because of an illness or disability. It will continue to pay out until they return back to work or until the end of the policy term, which is usually retirement.

“Short-term income protection cover is designed to cover periods of temporary unemployment and incapacity, or to meet the cost of a specific debt. It will generally pay out for 12 months rather than until recovery or retirement.”

The website identifies three types of short-term income protection:

• Accident, Sickness and Unemployment (ASU). Pays a tax-free monthly income for a maximum of 12 months if a client is off work due to sickness, accident, or unemployment.

• Mortgage Payment Protection Insurance (MPPI). Gives a monthly payment to meet mortgage and mortgage-related expenditure in the event of accident, sickness and or unemployment.

• Payment Protection Insurance (PPI). Covers credit repayments, such as loans or credit cards if a client is unable to work due to accident, sickness or unemployment.

Tom Baigrie, chief executive of LifeSearch, says that today proper protection advisers who talk about income protection products are referring to policies that were once known as ‘permanent health insurance’ and not PPI, MPPI or ASU.