Income protection explained
It is sensible to consider taking out income protection insurance from day one of your career, but as it progresses so your responsibilities and liabilities grow, making cover increasingly more important. Your lifestyle, and that of those around you, becomes dependant upon your income. Are you clear what would happen to your income if you were no longer able to work? More importantly, are you sure it is adequately protected?
Why should you consider income protection?
The principal benefit of income protection insurance is to provide you with income if you are unable to work due to long-term sickness or injury. Unlike other protection policies, such as critical illness or term assurance that pay out lump sum benefits, income protection insurance is designed to provide you with a regular monthly income which continues until the first of these events:
• you recover and are no longer incapacitated
• you are no longer suffering a loss of earnings
• the policy ends
• you die
The policy ends when you reach the maximum age chosen when you took out the policy. The options are usually age 50, 55, 60 or 65. The lower the maximum age, the lower the premiums.
Benefits are paid free of tax and National Insurance and because of this, the maximum amount of cover you can purchase is typically 50-60% of your pre-incapacity earnings.
Own occupation/other occupation/any occupation
Income protection insurance is heavily based on occupation for pricing and under which circumstances you can claim. An important consideration for some doctors is to choose an income protection policy that offers cover on the basis of your own occupation. This is of particular benefit if, for example, you are a surgeon and wish to be insured on the basis of that specific profession. Losing a finger is more likely to restrict you than it would if you were a GP.
Different insurance companies offer different definitions of incapacity. You should check with your financial adviser what is most appropriate for you, but the most common options are:
own occupation: you will be able to claim if your incapacity is sufficient to prevent you from carrying out your own occupation
any suited occupation: you cannot claim unless you are too ill to carry out your own occupation, and any other occupation to which you are suited, as defined in your policy
any occupation : you cannot claim unless you are too ill to carry out your own occupation, and any other occupation, as defined in your policy
activities of daily living: you can only claim if you are unable to carry out a selection of everyday tasks, such as washing and dressing yourself, as defined in your policy
activities of daily working or personal capability assessment : you can only claim if you are unable to carry out a selection of work-related tasks, such as walking, communicating and exercising manual dexterity, as defined in your policy
Each occupation is also listed under a class banding which ranges from 1 - 4 (1 being the cheapest to insure, 4 the most expensive or declined). Doctors generally come under a class 2 occupation (but a few insurers have a special M (for medical) class), which means they can get income protection at a good price and they can also have cover under their own occupation which is the most comprehensive type.
NHS income cover structure
The way in which your income protection cover is structured for your NHS work should be based on the benefits you would receive through the NHS sick pay scheme. When you first start work as a doctor you will have limited sick pay entitlement, so will need income protection cover to start quickly. However, as a doctor with at least five years continuous service, you would receive six months full pay and six months half pay through the NHS sick pay scheme if you were unable to work. Therefore, there is no need for your income protection policy to start paying out benefits immediately for your NHS income. Under the policy, this waiting period, during which you are not working and not receiving benefits from your policy, is known as the deferred period. Your income protection cover for your NHS income should ideally have deferred periods to reflect receipt of existing sick pay benefits. For example, for a doctor with full sick pay entitlement:
Deferred period % of benefits paid
Weeks 1 - 26 0%
Weeks 26 - 52 50%
Week 53 onwards 100%
As a member of the NHS Pension Scheme you may also be eligible for an ill health retirement pension (IHRP), from week 52, if you meet the disability criteria applied by the scheme. The amount payable is dependant on your NHS pensionable service to date. However, IHRP is not guaranteed so you may wish to take out more income protection benefit to protect your self against non-payment.
Private income cover structure
For your private income, however, the situation is different. With no NHS sick pay scheme reimbursing you for income lost through long-term illness, a shorter deferred period is required. Normally a separate policy, covering your private income, is set up to run concurrently with your NHS income protection policy. For this policy, most doctors choose a four week deferred period as, typically, income from previous work is still ongoing. Note that the longer the deferred period, the cheaper the premiums so you could choose a longer deferred period and supplement your income with any savings you might have. You should check your policy carefully to ensure that any NHS sick pay you receive during this period is not deducted from your claim for private income.
When choosing an income protection policy, whether for NHS or private income, there are some other useful benefits to look out for, including the flexibility to allow for career breaks such as sabbaticals, or extended career breaks of up to five years to look after young children. A good career break option should allow you to reinstate cover at the end of the break with no additional underwriting. Benefit indexation is also an important feature since it ensures your benefits increase each year to match price inflation.
In addition to their NHS and private hospital work, some consultants may have a private office staffed by employees who do not work for the NHS. The expense of running this office during a period of long-term sickness or injury will be the entire responsibility of the consultant. In these circumstances it would be advisable for the consultant to take out a professional expenses insurance policy that would pay staff salaries and also contribute towards other fixed expenses such as rent and other office maintenance charges.
Most income protection insurers offer rehabilitation packages as part of their service. Since it is in their interest to get you back to work as quickly as possible (so they can stop paying your monthly benefit), the cost of this is included in your premium.
David Sawers, Deputy Editor at Health Insurance and Protection
With thanks to LifeSearch, Norwich Union Healthcare and Wesleyan Assurance Society