Too many think short term income insurance

The income insurance market in the UK is large, well-developed and still growing. A large proportion of this growth is, however, concentrated in the payment protection market.

Short-term focus

When people take out credit cards, mortgages and other forms of personal debt they quite rightly wonder what would happen should they fall ill and be unable work. They also consider what would happen if they were to lose their job. In both of these cases the borrower would likely have difficulty making their loan repayments unless they have substantial savings.

This is why many people turn to the income insurance market for earnings protection. When taking out a mortgage loan, for example, it is very common for people to take out mortgage payment protection insurance (MPPI) to cover than loan. The big issue is that these types of policies will only ever payout for a maximum period of 24 months, with most plans only lasting for 12 months.

Long-term needs

This ‘maximum benefit period’ might be okay for redundancy protection as unemployment is often a short-term event as most people strive to find a new job as quickly as possible. Unfortunately the same cannot be said for accident and sickness, which can quite frequently have a long-term impact.

For someone who comes down with a long-term illness or suffers a serious disability they may be okay making their loan repayments for the first 12 or 24 months of incapacity with payment cover but what happens after that? They would have to rely on state benefits not only to survive but also to repay debt. With incapacity benefit standing at just over £95 per week this would be very difficult for most households.

The safer choice

A far more sound method of earnings cover is long-term income protection, which can payout not for a maximum period of 24 months but all the way until retirement if the policyholder was unable to return to work. Naturally, this form of cover often comes with increased premiums relative to payment insurance but provides a much greater level of protection.

The value factor

In fact, given the current rates available for accident and sickness cover, the relative differential in premiums between this policy and long-term income insurance as compared to the relative difference in policy coverage would often favour long-term cover from a value perspective also.

Thus, individuals would be far better protected at a relatively attractive rate if they were to think beyond 12 or 24 months and look more to the future, especially if they are looking to cover a long-term loan.