Income Protection
Income replacement insurance provides an income should you be prevented from working due to sickness or injury. It is commonly known as permanent health insurance or sometimes PHI. The word "permanent" in the name, refers to fact that the policyholder is the only person who can stop the cover during the term of the policy (this would be through the non-payment of premiums or cancelling the policy directly.) The insurance company cannot withdraw cover, under any other circumstance, once the contract has been accepted and premiums have commenced.
These plans work by paying you an income, usually equivalent to 50 - 65% of your usual salary, if you are unable to work for a long period. The income is generally paid until the termination date of the policy, which can be before your retirement age, depending on the policy's terms and conditions.
If you are self-employed then the benefits under the plan are calculated based on the amount of your taxable income, normally for the 12 months before you became unable to work.
Care should be taken to check what the insurance company means by disability. As a general rule it is better to consider a plan that pays the benefit if you are unable to carry out your usual occupation. This type of cover is referred to as 'own occupation'. Some plans will only pay a benefit if you are so sick or disabled that you cannot work at all. You should take into account that it is far less likely you will be unable to do any work than you are unable to continue your usual occupation.
The income from an income protection plan or scheme is tax-free but you do need to be aware that any income you receive may have an impact on any state incapacity benefit that you wish to claim. There can also be situations where if you are receiving income from other sources, during the period of your sickness or injury, the benefits under you plan could be scaled back. A good example is where you are forced to retire early from your usual occupation and start receiving an ill health early retirement pension. In such instances the Insurance Company may scale back the benefits under your income protection plan.
