What is an Income Protection Insurance Policy and how does it work?

What is an income protection policy and how does it work? In a nutshell, this insurance protects your income against the unexpected happening. Certainly, none of us know what is around the corner and when it comes to falling victim to redundancy or becoming too ill to work due to accident or long term sickness, this is especially so. Stop to think for one moment as to how you would cope if one of these events happened to you. Without a regular monthly income, how would you manage financially with the demands of your mortgage / rent, utility and other bills?

This is where an income protection insurance policy can step in and provide a monthly cash free sum to see you through a difficult financial time. It allows you to continue meeting your financial commitments while you recover or seek alternative employment.

In the event that you are involuntarily made redundant or are unable to work due to incapacity, an income payment protection insurance (to give it its full name) provides a financial safety net that can be used for whatever purpose you wish. The aim of the policy is to provide you with an income when yours is lost.

When can I claim?

Policy features and benefits vary among the different providers, but typically, your policy will start to pay out the cash benefits anywhere from 30 - 90 days after you become unemployed or incapacitated.

Some policies will back date the cover to the first day that you are unable to work, so look out for this added benefit when choosing your cover. Once the protection insurance has started to pay out, it will run for 12- 24 months, or until you are back at work again, whichever is sooner. Again, the term of how long the benefits run for depends on the provider, so always make sure that you know what the cover entails.

The cost

What about the cost, is it high? The payment protection insurance industry has been in the spotlight a lot over the last few years' with media reports of the high street banks and lenders often charging exorbitant premiums for this cover as well as selling it to people who are not eligible to claim on the policy.

The positive side to this is that it has brought a new awareness to the industry and many consumers are now aware that they can shop around among the standalone providers for their income protection insurance and get a good deal.

By 'standalone providers' we mean those companies that sell the insurance independently of any borrowing such as loan or mortgage, such as SafetyFirst.co.uk. These providers often tend to be much cheaper than their High Street counterparts and, because they are selling the policy independently of any borrowing, they are focused on finding cover that best suits your personal circumstances.

Again, because of the media coverage, consumers are also more aware of the pitfalls ie where and when they are not eligible to make a claim under this cover. Typically this will be people in part time employment; of retirement age; and those with a pre-existing medical condition. Always seek professional advice of you think this may apply to you.

In summary, there is no doubt that an income protection insurance policy can be a financial lifeline at an already stressful time. By shopping around now for the best deal and ensuring the cover is right for you, you can protect your finances against the unknown.