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Beginner's Guide To: Income protection

What is income protection insurance?

IPI is a cover paying out as a regular monthly income from a deferred period after the incident up until a set age, which the claimant can decide. The aim is to return you to your original position. So, by paying out a maximum of 50-65 per cent of previous gross earnings, it provides an incentive for recovery and a return to work. The self-employed can choose individual policies, but need to tread carefully; on what basis will the insurer pay out?

When would I need it?

In the case of a serious illness, medical condition, or accident that renders you unable to work, IPI would pay you an income. With the odds of becoming unable to work at one in seven (according to the Department for Work and Pensions), IPI seems quite necessary; state benefits are low and depend on assessments. You should have income protection as a homeowner, especially if you have a family.

What about payment protection insurance (PPI)?

Payment protection insurance is a way to cover your loan, credit-card or mortgage repayments in case of illness, accident and also unemployment through no fault of your own. PPI pays out for a limited time, usually 12 months, but income protection can provide an income for the long haul. PPI is usually sold packaged with loans, mortgages and credit cards as a "single premium policy"; you pay a lump sum, added to the initial loan. Subsequently, you're paying interest on both. You need to pay close attention to its many restrictions and exclusions.

How much does IPI cost?

Premium prices vary. Women tend to pay higher premiums than men, as do smokers and those with a poor medical history. The higher the risk inherent in your work, the more you pay. Costs vary depending on your specifications, so if you want a wider cover, a longer payment period or a shorter period before payment starts, you pay more. A higher replacement income, or any extra options, will stretch the price.