Income Protection Insurance: Why It’s Important and Why Many Overlook It |

Income Protection Insurance: Why It’s Important and Why Many Overlook It

Life is full of uncertainties. Health issues, accidents, or unforeseen events can suddenly disrupt our ability to work and earn an income. For most people, their income is their most valuable financial asset—it funds everyday living expenses, mortgage repayments, family needs, and future goals. Yet, despite its critical importance, many people either overlook or underestimate the need for income protection insurance.

This article explores why income protection is essential, the misconceptions that lead people to ignore it, and why now is the time to reconsider this vital safety net.

What Is Income Protection Insurance?

Income protection insurance is a financial product designed to replace a portion of your income if you’re unable to work due to illness, injury, or disability. Unlike critical illness insurance, which pays a lump sum for specific medical conditions, income protection provides regular, ongoing payments until you recover, retire, or reach the policy’s end.

Most policies cover between 50% and 70% of your gross income, ensuring that you can maintain your lifestyle and meet financial obligations even if you’re unable to work for an extended period.

Why Income Protection Insurance Is Important

1. Your Income Is Your Most Valuable Asset

While people often insure their cars, homes, and even mobile phones, many neglect to protect their income—the very resource that enables them to afford everything else. If you suddenly lost your income, how long could you cover your living expenses? For most people, the answer is “not long.”

2. Government Benefits Are Limited

Many people assume they can rely on state benefits if they are unable to work. However, government support is often minimal and may not be sufficient to maintain your standard of living. For example, in the UK, Employment and Support Allowance (ESA) provides a maximum of around £77 per week during the assessment phase, which is far from adequate for most households. Income protection bridges this gap, offering a more substantial and reliable source of financial support.

3. Long-Term Financial Security

Short-term savings might cover a few weeks of missed income, but what if you’re unable to work for several months or even years? Income protection provides a long-term solution, ensuring that your financial stability isn’t compromised by prolonged periods of illness or disability.

4. Flexibility and Customization

Income protection policies are highly customizable. You can choose:

The deferral period (how long after you stop working the payments begin).
The benefit period (how long the policy will pay out, which could be until retirement).
The percentage of income to cover.

This flexibility allows you to tailor a policy that fits your budget and specific needs.

Why Do People Ignore Income Protection Insurance?

Despite its importance, many people overlook or avoid income protection insurance. Several reasons contribute to this:

1. Misconceptions About Risk

One of the most common reasons people neglect income protection is the belief that “it won’t happen to me.” Many people assume that serious illness or injury is unlikely and therefore not worth insuring against. However, statistics tell a different story. According to the Association of British Insurers (ABI), one in four people in the UK will experience a prolonged period of illness or injury that prevents them from working at some point in their lives.

2. Cost Concerns

Another major barrier is the perceived cost of income protection insurance. Many people believe it’s too expensive or unaffordable. However, premiums can be surprisingly affordable, especially if you’re young and healthy. Additionally, the financial security it provides far outweighs the monthly cost of the policy.

Example:
A healthy 30-year-old non-smoker might pay around £20-30 per month for an income protection policy that covers 60% of their income. Compare that to the financial hardship of losing your income entirely, and the value becomes clear.

3. Overreliance on Employer Benefits

Some people believe their employer’s sick pay policy is sufficient. While many employers offer some form of sick pay, it often lasts only a few weeks or months. Income protection can extend well beyond this period, providing financial stability for as long as you need it.

4. Complexity and Lack of Awareness

Many people find insurance products confusing and may not fully understand what income protection covers or how it works. This lack of knowledge often leads to inaction. Additionally, income protection is less widely discussed than other types of insurance, such as life insurance, which can result in lower awareness and uptake.

Who Needs Income Protection?

While income protection is beneficial for almost everyone, certain groups are particularly vulnerable and should seriously consider it:

Self-Employed Individuals: Without employer benefits like sick pay, self-employed individuals are entirely responsible for their income. If they can’t work, their income stops.
Contractors and Freelancers: Similar to the self-employed, contractors and freelancers often have no safety net beyond their own savings.
Primary Breadwinners: If your household relies heavily on your income, losing it could have severe financial consequences for your family.
Young Professionals: While younger individuals may feel invincible, taking out a policy early can lock in lower premiums and provide protection for the long term.

Why You Should Seek Professional Advice

Given the variety of policies and options available, choosing the right income protection insurance can be challenging. This is where professional advice can make a significant difference.

Access to the Whole Market: A qualified financial adviser can assess your needs and compare policies from multiple providers to find the best fit for you.
Tailored Solutions: An adviser will consider your income, occupation, lifestyle, and budget to recommend a policy that provides adequate coverage without unnecessary costs.
Guidance on Policy Terms: Income protection policies can be complex, with various deferral periods, exclusions, and benefit limits. An experienced adviser can help you navigate these terms and ensure you understand your coverage.

At Mc Daid Mortgages, we specialize in providing tailored advice to clients in the North of Ireland. Our team of fully qualified, regulated advisers is committed to helping you find the right income protection policy to safeguard your financial future.

Final Thoughts

Income protection insurance is an essential yet often overlooked aspect of financial planning. It provides a crucial safety net, ensuring that you can maintain your lifestyle and meet financial obligations even if you’re unable to work due to illness or injury. While many people underestimate the risks or worry about the cost, the reality is that losing your income could have far greater financial consequences.

Don’t leave your income unprotected. Take the time to explore your options and consider seeking professional advice. At Mc Daid Mortgages, we’re here to help you understand your options and find a policy that provides the security and peace of mind you deserve.

Contact us today to learn more about how we can help you protect your income and your future.

As with all insurance policies, conditions and exclusions will apply