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How Income Protection Works

January 23, 2012 | Comments: 0 | Views: 120

Income protection is one of the rarely requested, but most needed, insurance policies a working adult should invest in. Everyone suffers illness at one time or another, and on occasion it can be serious enough that you have to miss work. It can even result in temporary or permanent disability. Many employers offer sick pay but often for a limited time period. They cannot afford to keep you on the payroll indefinitely. Sick pay is often at a reduced rate so you will encounter the difficulties of trying to survive on less. For families where there is only one breadwinner, this brings forth harsher realities.

Having an income protection policy means you will be able to return to practically the same level of income as what you were earning prior to the illness or accident. It is a guarantee of continued income flow in the event of an injury or illness that forces a person to stop working hence losing earning capacity. Most policies payout up to a maximum of about three quarters of the gross salary normally earned. This is because the payouts are tax free and the insurance companies do not allow their policy holders to benefit unfairly from such cover. The insurance company may also reduce the payout further in the event there are other incomes and benefits the policy holder is deriving.

As with all policies one needs to look at the cost involved. The pricing on income protection policies is partly dependent on the deferred period that applies. The deferred period refers to the period between when you stop receiving sick pay and start to receive payouts. The longer the deferred period, the lower the premium you'll pay on your policy. Other factors that can drive up the cost of premiums are the type of occupation the policy holder is engaged in and their general state of health.

Policy holders can also reduce the premium on income protection by opting for lower coverage. This means the policy holder is agreeing to less than their regular salary when receiving insurance payouts. Insurance companies offer a choice of long term and short term income protection policies. Long term policies cover the policy holder from the end of the deferred period up when the pension begins. Short term policies are limited to a specified period like twelve or twenty four months. Naturally short term policies are cheaper than the long term option.

Self employed individuals can also benefit from income protection cover but will need to consult further with their choice of insurer. There is some dissent as to how to evaluate the earnings of businesspeople so it is best to find out how the insurer will assess your books and agree on a payout sum. It is worth noting that the policy for a self employed person is likely to be higher as they are not likely to pay themselves sick pay and will probably rely on insurance payouts from the onset of illness.

As with any insurance policy, it is important to shop around. Get quotes from as many reputable insurers as possible and always read and understand the fine print. Some insurers offer highly priced income protection policies to women as they believe their gender is prone to more health concerns. These kinds of attitudes may be surprising but are a valid reason to consider as many options as possible before settling.

Find here the information about income protection and income protection cover.

Source: EzineArticles
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