There is a lot of overlap with mortgage protection planning but with some key differences. Rather than providing a lump sum for repayment of a debt or specific need, income protection is planning to replace income that was available to a family in the event of death or serious illness. The main types of policies are explained below:
Lump sum life and/or earlier critical illness
Basically, these policies are lump sum plans however you may choose to receive the lump sum benefits over a period of years to replace lost income. This may be in the shape of a family benefit plan. An alternative is to insure a lump sum and upon receipt of the lump sum invest it in order to provide an income. We never sell products based on guesswork and have years of experience using tried and tested formulae to meet this need. An example could be:
£10,000 per annum needed. Assumed growth rate 4%. £10,000 / 4 x 100 = £250,000 sum assured needed. Simply put by investing £250,000 if you get a growth rate of 4% you may be able to assume £10,000 income for life. Obviously this takes no account of inflation and depends on investment returns which are by no means guaranteed but helps explain the complexity of options faced by our clients.
ASU (Accident, Sickness and unemployment)
Whereas the policies above are designed to pay lump sums, ASU plans pay a regular income, usually for a fixed period of time. In other words let’s say your household bills are £1,000 per month, an ASU policy will pay this income to you in the event you are unable to work though accident or illness or even made redundant. Crucially these policies are usually shorter term and will only pay for a maximum period such as 1 or 2 years only. Designed to relieve shorter term financial pressures allowing you to recover and return to work.
PHI (Permanent Health Insurance)
Similar to an ASU policy (but excluding redundancy) in the event of accident or sickness, the monthly sum assured is paid until the end of a longer specified term and usually age related, for example age 65. Therefore PHI plans are permanent and once in payment will not be stopped unless you return to work and recover. They are not just paid for a shorter periods of time and can pay out many hundreds of thousands of pounds. Crucially PHI policies can only be arranged for a % of pre incapacity earnings perhaps 60% with the idea being this provides some motivation to return to work.
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