Many people wait until a lifestyle event before taking out income protection insurance, such as taking out a mortgage or having a baby, but new Drewberry research reveals that a large proportion of workers could make significant savings by taking out cover now rather than waiting.
The need for income protection
Income protection provides you with a monthly income, so you can keep up with all your essential outgoings should you suffer an illness or injury that prevents you from working. It is an extremely important policy given the low level of state support available during times of incapacity, with the Employment & Support Allowance (ESA) only paying up to £71.70 per week during the first 13 weeks assessment period and up to £106.50 per week thereafter.1
Many people make the mistake of thinking that an illness or injury will only keep them off work for a short period of time, but statistics from the insurer Aviva show that the average claim length on their income protection plan is over 9 years! 2 Thus, it’s vital to consider how long you would be able to survive if your income ceased today.
Take out cover as young as possible
It is common for people to think, ‘I’m young, I don’t need to protect my income.’ However, the statistics paint a very different story. In just 3 months up to February 2013 over 30,000 people under the age of 25 and nearly 80,000 people under the age of 35 started claiming ESA due to incapacity.3 In fact, LV’s claims statistics from 2012 shows their youngest income protection claimant to be just 21 years old.4
If you have essential bills to pay and wouldn’t be able to survive on state support then it makes sense to consider taking out income protection as early as possible. For a large proportion of the workforce, not only would you be covered for longer but you may also be able to make significant savings over the life of the policy by locking-in lower premiums at a younger age, as shown by the example below.
The graph below shows the total premiums paid over the life of the policy for a non-smoking office based worker looking to cover £2,000 per month. The plan would start paying out after 13 weeks of being off work and could continue paying out right up until the age of 65 if they were too unwell ever to return to work.
For all but the most manual of workers, it is possible to take out an own occupation income protection policy where the monthly premiums charged by the insurer are fixed. This means we can calculate how much the policy will cost right up until age 65.6
In this example, it can be seen from the graph above that the total premium over the life of the policy (i.e. the sum of all monthly premiums) amounts to £13,608 if the policy was taken out at age 30. If the policy was taken out 10 years later at age 40 the total premium would be £15,954.
Thus, someone who took out a policy aged 30 could save over £2,300 compared to taking out cover at age 40, and they would be protected for an additional 10 years! If that person had taken out cover at age 25 rather than age 40 they could have saved over £4,300!
Take out cover when you’re healthy
For a large number of workers not only is it possible to pay less for a longer period of cover by taking out a policy at a younger age but it also means that the plan is less likely to contain any exclusions.
When applying for an income protection plan the insurer will ask a number of health related questions and could put an exclusion on the policy or even increase the premium charged if you’ve suffered any medical conditions in the past or worst decline the cover altogether. This means the best chance of gaining cover without any exclusions and at the lowest possible premium is to apply as young as possible when you are fit and healthy.
Naturally as you grow older you may need a higher monthly benefit to cover childcare or a larger mortgage. If you already have an income protection plan this wouldn’t be a problem as many insurers allow you to increase your level of cover after these types of lifestyle events without having to provide any additional health information.7
Illness or injury can strike at any age and it can last a very long time, so if you have essential bills you need to pay each month it’s vital to consider what provisions you have in place to cope.
By taking out income protection at a younger age with ‘guaranteed’ (fixed premiums) you could lock-in low rates and make significant savings over the life of the policy, and benefit from the protection of the policy for a longer period of time. Not only this, but your policy could include fewer medical exclusions if it is taken out when you are young, fit and healthy.
3. Department for Work and Pensions (DWP), Employment and Support Allowance On Flows (February, 2013).
4. Liverpool Victoria (LV), ‘Protection Claims Facts at a Glance for 2012’.
5. In this example an office based worker is taken to be someone in an occupation risk class one, such as an accountant or administrator. Similar results were found for risk classes 2 and 3. Please note that ages 25 to 50 have been selected as they are representative of our client base and results may vary for other ages. The pricing assumes a standard risk in terms of applicant health and lifestyle. Quotes for the example were accessed from Webline on 17/09/2013 and premiums relate to the following insurers, which were selected based on them being the lowest priced for that age:
6. Please note that the results may differ if index-linked cover is selected as inflation rates vary over time and different insurers use a different methodology for how premiums rise in relation to benefit rises.
7. Please note that any additional cover taken out at a future date is likely to be priced at rates based on your age at the time.