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5 common income protection myths busted

Category: News
Income protection, myths

When you purchase a new smartphone, the salesperson often asks if you want to insure your device. You might say no because you feel that it’s an unnecessary additional cost. After all, you’ve never broken or lost your phone before and you may assume it’s unlikely that you will in the future.

This is an example of “optimism bias” – the tendency to overestimate the likelihood of positive outcomes and underestimate the chances of negative events.

Many of us experience optimism bias about illness or injury too, thinking it’ll never happen to us. However, you can’t see into the future, and it may be useful to be prepared for every eventuality.

That’s why income protection is so valuable. It pays a regular income if you’re unable to work for a period, so you can cover your living expenses and contribute to savings for the future.

Encouragingly, Money Marketing reports that sales of individual income protection policies hit a record high of 247,000 in 2023. Yet, there are still some common misconceptions about this type of protection that you might believe.

Read on to learn five income protection myths and why they aren’t true.

1. Income protection doesn’t pay out

One of the most common myths about all types of protection is that the provider will avoid paying claims whenever they can, so you’re unlikely to benefit. As a result, you might think that purchasing income protection simply isn’t worth it.

In reality, your chances of receiving payments from income protection when you need them are very high. For example, Aviva reports that in 2023, it paid 92.5% of all claims, with a total value of £53 million in monthly benefits.

In most cases where claims were denied, it was because the policyholder failed to provide relevant health and lifestyle information at the point of purchase.

Additionally, Aviva provided rehabilitation support services to income protection claimants, helping them recover and return to work faster.

So, provided you give accurate information when purchasing income protection, it’s very likely to pay out if you need it.

2. Income protection is the same as critical illness cover

You might’ve been led to believe that income protection and critical illness cover are essentially the same and you only need one or the other.

This myth may arise because both types of protection are designed to support you if you fall ill, but there are important differences.

Critical illness cover pays a lump sum if you’re diagnosed with a qualifying illness, whether it stops you from working or not. This payment is designed to help you manage increased costs caused by your illness, such as medical costs or specialist equipment. You may also use it to cover living expenses if you can’t work, pay off your mortgage, or contribute to retirement savings.

If you’re diagnosed with a lifelong condition, the lump sum from critical illness cover could help you and your family maintain financial stability.

Income protection, on the other hand, provides a monthly payment if you’re unable to work. This is normally less than your full salary and is there to bridge the gap and reduce disruption to your financial plan until you’re able to return to work.

In many cases, income protection may not offer long-term financial stability as it’s designed to be an interim solution. So, the payments might not be enough for you to maintain your lifestyle if you have a lifelong health condition.

As such, the two types of protection have distinct benefits and you may want to purchase both to ensure that you and your family are prepared for every eventuality.

3. Income protection pays out if you’re made redundant

Income protection normally pays benefits when you’re out of work, and this leads some people to believe that it also covers redundancy. However, this isn’t normally the case and it typically only applies to injuries and illness as standard.

That said, many providers do offer an optional add-on to their income protection policies, or they might provide a separate type of protection called “unemployment cover” or “redundancy insurance”. If you’re concerned about redundancy and want to protect your income, it’s important that you check the wording of the policy carefully so you can ensure you have adequate cover.

4. Income protection payments start immediately

You might be under the impression that income protection starts paying out immediately if you’re unable to work. Normally, this isn’t the case and there is a waiting period – often called a “deferral period” – before the payments begin.

The deferral period varies and typically, the premiums are lower if you have a longer wait before the payments kick in.

When purchasing income protection, you may want to consider the sick pay policy your employer offers, if any. Also, bear in mind you’ll receive Statutory Sick Pay (SSP) from the government for up to 28 weeks, though this is only £116.75 a week in 2024/25.

Usually, it’s beneficial to align the deferral period with your employer’s sick pay policy so once payments from them stop, your income protection takes over.

5. Income protection doesn’t cover pre-existing conditions

If you have a pre-existing medical condition, you may believe that you’re unable to purchase income protection. Fortunately, this isn’t necessarily true.

While some providers might not cover pre-existing conditions, many will. That said, the premiums will normally be higher and there might be other stipulations. For example, some insurers might cover everything apart from the existing condition.

Often, the price and level of cover depend on the severity of the health problem and the effect it has on your life. If it’s a relatively minor condition that’s unlikely to affect your ability to work, it may be easier to find suitable income protection cover for a reasonable price.

Conversely, if you have a serious health condition that regularly causes you to be out of work, you might find that you pay significantly more for income protection.

Despite the increased costs, it’s important that you are honest about your health when purchasing income protection. If you withhold information to reduce your premiums and your insurer finds out, this could mean that you’re unable to make a claim when you need to.

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We can give you guidance about ways to protect yourself and your family from the unexpected.

Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.

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