What would you do if you lost your income?

If you suddenly lost your ability to work due to injury or illness, the financial consequences could be devastating. This is a situation that many people don't think about until it's too late.
 
When a major illness or injury strikes, your immediate concern is naturally your health and recovery. However, the stress of mounting bills and a sudden halt in your income can significantly hinder that process.

Imagine one day you're healthy and working, and the next you're unable to perform your job. How would you pay your rent or mortgage, buy food, and cover other bills? An emergency savings fund might cover a few months of expenses, but what if your recovery takes longer? This is where long-term financial planning becomes crucial.

Assessing the damage

The first steps when faced with an income-halting event involve an assessment of your financial situation:

• Review Existing Coverage: Do you have any sick pay from your employer? Most jobs offer limited short-term sick leave, but this often runs out quickly. Do you have any existing individual insurance policies?
• Government Benefits: You might be eligible for some form of state benefits, but these are often minimal and may not be enough to cover your basic needs, let alone your lifestyle.
• Emergency Fund Status: How many months can your savings cover? Be realistic.

The gap between your essential monthly expenses and your available money can be alarmingly large. This gap is what income protection insurance is designed to fill.

What is Income Protection Insurance?

Income protection insurance (also known as income replacement or disability insurance) is a policy that pays you a regular, tax-free income if you can't work due to illness or injury. Essentially it`s a safety net for your ability to earn money.

Unlike critical illness insurance, which pays a lump sum for specific severe conditions, income protection pays a regular monthly salary until you can return to work, or the policy term ends (often retirement age). It's a more comprehensive form of coverage because it typically covers any illness or injury that prevents you from working, not just a predefined list of critical conditions.

Could Income Protection benefit you?

If you rely on your income to pay your bills and have dependents, income protection is arguably one of the most important types of insurance you can have.

Consider these factors:

• Reliance on Income: If the loss of your salary would cause significant financial hardship, you need this cover.
• Length of Recovery: Most people underestimate how long it can take to recover from a serious illness or injury. Statistically, you are more likely to be off work for a long period due to illness than to die before retirement age.
• Lack of Savings: If you don't have sufficient savings to cover years without an income, income protection is essential.

Matters to consider

When looking at cover, you'll come across some important terms:

• The Deferral Period: This is the waiting period from when you stop work to when the policy starts paying out. You can choose this period (e.g., 4, 8, 13, or 26 weeks). The longer the deferral period, the cheaper your premium, as you would use savings or employer sick pay in the meantime.
• Cover Amount: Policies typically pay out a percentage of your gross income, often between 50% and 70%.
• Own Occupation vs. Any Occupation: An "own occupation" policy is usually more expensive but pays out if you can't perform your specific job. "Any occupation" policies only pay if you can't perform any job at all, which is a much stricter definition. It is highly recommended to seek "own occupation" coverage.

Next steps for Peace of Mind

Don't wait until it`s too late to plan. The best time to put income protection in place is while you are healthy and working.

1. Assess Your Needs: Calculate your essential monthly expenses.
2. Consult a Financial Adviser: A professional can help you navigate the complex market and find the policy that best suits your needs and budget.
3. Read the Fine Print: Understand what is covered, the exclusions, and the claims process.

Seeking Professional Advice

Losing your income due to injury or illness is a frightening prospect. However, with careful planning and the right cover, you can protect yourself and your family from financial ruin, allowing you to focus solely on what matters most: your health and recovery. Your Dentons Adviser can help you work out the right option for your personal circumstances.

This article does not constitute advice, and we recommend obtaining financial advice from a regulated financial adviser before making any retirement decisions.