Income protection: Types of income protection
There are three types of policy you can buy to protect your income if you're unable to work due to illness or accident.
Here, we explore the pros and cons of each of them.
Different types of income protection policy
- Long-term income protection: This type of IP policy pays out until a fixed age, death or your return to work. It's underwritten at the point of applying for the policy, rather than when you put in a claim. This means you’ll know exactly what you're covered for from day one, as well as any pre-existing conditions you're not insured for.
- Short-term income protection: Like long term income protection, this type of policy is fully underwritten when you take out the cover. However, rather than pay out until death or retirement, short term income protection, known as Stip, has a fixed maximum payout period of between one and five years.
- Accident, sickness and unemployment (ASU) cover: ASU providers may screen potential customers, but do not conduct full medical underwriting at the outset. Cover tends to be cheaper than IP, but you have less certainty that you'll be covered when you come to put in a claim. As the name suggests, ASU policies cover you for unemployment.
Your employer may also provide a version of one of these forms of cover as part of a group scheme. You should check whether this is available - as it is often cheaper to buy cover this way than direct from an insurer.
Guaranteed, renewable and age-related IP
Once you've chosen the type of policy that meets your needs, there are three price bases to choose from:
- Guaranteed: The amount you pay stays the same throughout the policy term. The premium will only go up if you increase the cover. Most cost slightly more to start with, but we believe they are best if you can afford the extra cost. For a forty year-old, non smoking administrative clerk covering a payout of £250 per week, a guaranteed IP premium will typically be between £25 and £40 a month.
- Reviewable: These policies tend start a little cheaper than Guaranteed policies, but the premiums are reviewed after a set period - typically every five years - at which point the provider can increase the amount. Some insurers reserve the right to increase your premiums with as little as 30 days' notice on a reviewable policy.
- Age-related: These policies are good for people in higher-risk jobs or for smokers because these factors aren't always taken into account when deciding the premium. Often starting off cheaper than guaranteed and reviewable policies, the catch is that the premium will go up each year as you get older. However, unlike reviewable policies, the age-related price increases are calculated and agreed with you when you take out the policy - so you won't be caught out by any unexpected price hikes.
Different IP occupation groups
Premiums vary according to your occupation, health, whether you smoke and the level of cover you need.
How your job affects what you pay
Your job often affects how much you pay for a policy, although some insurers do not differentiate between different occupations. Many insurers group jobs into four categories of risk, though some have more. For example, jobs may be divided into the following groups:
- Class 1: Professional; managers; administrative staff; staff with limited business mileage; admin clerk; computer programmer; secretary
- Class 2: Some workers with high business mileage; skilled manual work; engineer; florist; shop assistant
- Class 3: Skilled manual workers and some semi-skilled workers; care worker; plumber; teacher
- Class 4: Heavy manual workers and some unskilled workers; bar person; construction worker; mechanic
If you want to check which occupational class you're likely to fall into, Drewberry Insurance has a handy income protection calculator.
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