PPI alternatives Income protection

A potentially much better alternative to PPI is another type of insurance called income protection.

How income protection works

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Income protection insurance is a better bet than PPI

This pays out a proportion of your income (50% is common) if you can't work because of illness, disability or accident. However, income protection won't cover you if you're made redundant. If you want redundancy cover you can sometimes bolt this on to income protection insurance for an extra cost, or you can take out a standalone policy.

Like all insurance policies, income protection plans take into account circumstances such as your age, gender, occupation, your health and whether you smoke or not. How much you pay in premiums depends on how much of a risk the insurance company sees you as.

Why is it better?

For many of us, income protection costs no more than PPI, but provides much better benefits. You can decide when the cover starts – after four weeks, three months, six months or even a year – so you can fit the cover around the cover you have from your employment.

So, for example, you can set your income protection plan to kick in after 28 weeks if that's when your employer stops paying sick pay. The longer the period before the cover starts paying out, the cheaper the premium

Income protection also continues paying until either you reach the end of the term (people often run the term through to their retirement age), or until you return to work. If you claim on the policy and then go back to work, your policy continues as before.

'Higher risk lives'

For some people, however, the cost of standard income protection may be too high.

However there are policies called 'age related' policies which don't calculate your premium according to gender, occupation or whether you smoke. These may be more suitable for higher risk lives.

There are also 'budget' income protection policies which pay out for shorter period and consequently have lower premiums.

There’s also the possibility that payment under an income protection policy might affect your state benefits - so you should always check this with your insurer or adviser.

Income protection can be expensive if you're in a risky or stressful job, if you have health problems or you smoke. In most cases, women tend to pay more than men.

Shop around

However, it's always worth getting a quotation for income protection first and then submitting an application to the most competitive providers. We suggest you take advice and get help shopping around the different companies.

You should always consult an independent financial adviser (who can search the whole market for you). Try to find one that specialises in income protection products.

Critical illness insurance

Many people are sold critical illness insurance, often in addition to PPI. But it's important to understand that critical illness insurance is not an alternative to PPI or income protection.

Critical illness insurance pays out a lump sum if you suffer from a serious illness like cancer or a heart attack. It can be useful additional cover because you can use it to pay off your mortgage or other large debts if the worst happens.

However, it won't provide you with a regular income while you're off work, and it won't cover you for accidents or conditions like back pain or stress.

So, although critical illness can be useful additional protection for those who can afford it, you shouldn't take it out at the expense of a general policy that gives you an income if you can't work as a result of any illness or disability.

Other alternatives to PPI

You can also consider mortgage payment protection to cover your mortgage payments, or a form of payment protection insurance that lets you choose the level of cover you need each month.

More information

The Financial Conduct Authority's (FCA) website offers information on all types of protection products.

Financial advisers read the Which? report on choosing and making the most of an independent financial adviser.

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