If your income dries up, who's going to pay your bills? Unless your employer offers generous redundancy and sick pay, you should take steps to find your own peace of mind.
Earlier in this series of articles, we wrote about the government's feeble safety net for homeowners and the problems of over-priced mortgage payment protection insurance (MPPI). However, the problems with MPPI don't end there, because it is very difficult to compare policies accurately. With MPPI policies, there are two important things you need to know:
'Back to day one' or 'excess' payments?
The most generous policies will pay benefits 'back to day one' after an initial qualifying period, typically 30 or 60 days. So, a 30-day 'back to day one' policy will pay you one monthly benefit if you are out of work for 30 days in a row. Less than 30 days and you get nothing; more than 30 days and you accrue a further daily benefit from day 31, which is paid monthly.
The worst policies have 'excess' periods of anything up to 60 days. This means that if you're out of work for 70 days, you only get 10 days' benefit - anything less than 61 days and you get nothing.
So, it's important to understand how soon your policy payouts would kick in. The next question is:
For how long does it pay out?
Most MPPI policies pay out up to 12 monthly benefits for a single claim, although some pay out for 18 or 24 months - the longer the payment period, the higher the monthly premiums. Once you've made a maximum claim, you'll need to re-qualify before claiming again.
One final warning: if you want full ASU (accident, sickness and unemployment) cover, make sure that's what you're getting, as many lenders also offer separate AS and U policies. On the other hand, you may prefer the security of being covered by:
Income protection insurance
One alternative to short-term accident and sickness cover is to go for income protection (IP) insurance, also called permanent health insurance. This is long-term sickness cover that pays you a tax-free income if you are certified unfit to work, usually up to age 60. Payments stop when you return to work, retire or die. IP is designed to replace your income during periods of serious illness or injury, so it won't cover short-term conditions, such as a bout of flu. Most IP claims relate to back or mental health problems.
The longer the 'deferred period' you choose before payouts begin, the lower your monthly premiums are. So, if you get six months' full sick pay from your employer, you could elect to receive IP benefits after a six-month waiting period, for a seamless changeover between the two.
With IP, you can choose to receive a level income, or have your payouts rise in line with inflation. As payouts are tax-free, you don't need to cover your entire salary: most people cover half or, at most, two-thirds of their income. Some employers offer IP to their workforces, so check to see if you can get it free (or buy it cheaply) from your company.
Although IP contracts can be fiendishly difficult to evaluate, they are certainly less complicated (and more generous) than state benefits! Next week, I'll elaborate on what you need to know in order to find the best cover for you.
More: Part One | Part Two | helpupay (Best Buy MPPI).
