What You Need To Know About: Income Protection

14/02/2014

How will you pay for the rent, groceries and all those other day to day expenses if you are unable to work due to long term ill health? UAE labour law says an employer must provide full pay for just 2 weeks followed by 2 weeks at half pay.

I have recommended that everyone have an emergency fund. This is a minimum of 6 months expenses held in cash, in an instant access offshore bank account. This financial buffer helps meet unexpected costs and reduces the cost of things like income protection plans.

Income protection is a form of insurance. It provides a regular income payment once the insured person has been unable to work due to an accident or illness. Payment of the benefit is usually started 13 or 26 weeks after the first day off of work. Payments continue until the person is well enough to return to work; reaches a predetermined age under the policy or dies.

As a person is more likely to claim for an illness that keeps them off of work for 3 months rather than 6, the cost of insuring for payment after 3 is higher than for 6 months. Therefore having an emergency fund that will keep you going for 6 months will save you money when considering income protection.

Policies are established on the basis of a persons ability to do either their own job; any job they are trained for or any job. Often there will be a review of a persons level of fitness following a specified length of claim, say 2 years, after which time payment will change from being based on the insured persons ‘own’ occupation to ‘any’ occupation. Since the ‘any’ occupation definition is much broader, the cost of this type of insurance is much lower.

Another factor that affects the cost of this type of insurance is a persons occupation: for example a professional diver is considered a higher risk than an office worker and so can expect to pay a higher premium.

Insurance companies will usually only allow someone to insure a maximum of 75% of their income. The logic being that there is an incentive to return to work. Where income is variable often an average over the 12 months before the claim will be used and the lower of the sum assured and 75% of the actual income will be paid.

Next week death duties in UK. If you thought you’d escaped the UK’s tax net, you’d better think again and if you are not from UK but have assets there you need to read next week’s post too.

Let me know if you have any questions, comments or concerns.