Income Protection Insurance - How It Got A Mortgage

 

For many years I offered my clients the standard insurances to protect against death and critical illness. These are powerful types of insurance and it is a moving experience when a client needs to make a claim and benefits from them. Income Protection Insurance has a different but equally important purpose which many clients and even some insurance advisers don’t really understand. The following is what income protection was able to do for my client, Beth (not her real name), who was going through an acrimonious divorce. 

 

Some years ago local solicitor asked me to help with Beth’s divorce case. As part of the process she needed to prove to the court how much mortgage she could afford. 

 

Such meetings are usually predictable. I find out full names, date of birth, address history, credit debts and so on and a crucial element is employment. However… , when I asked Beth about her work she replied that she did not have a job and had no employed or self-employed income of any kind. This is not what a mortgage adviser wants to hear during a mortgage review as it generally means that there is not much hope of arranging a mortgage or insurance for the person. However, I pressed on and Beth told me how she was able to live and pay her bills. 

 

Beth had set up an income protection policy in her twenties when she was fit and well. Now, due to ill health it was paying her £1650 per month, tax free and would continue to do so for another 16 years if she did not recover and go back to work. 

 

This changed things completely. I returned to my office to research lenders and found that there were several who would accept an application for a mortgage based solely on the benefit paid from an Income Protection Insurance policy. Some lenders understand that a well structured income protection policy is a guaranteed income. Once all the divorce was complete I arranged Beth’s mortgage with an excellent lender on a good low rate and she moved into her new home that year. 

 

That is a sweet story, but there is more! A few years later Beth contacted me to say that she wanted to extend her property and could I help with a further advance. Her insurance payment had been set up to increase with inflation, so the £1650/month had increased to £2010 every month tax free… 

So, she got the additional mortgage funds she needed and has a enlarged her home with a very comfortable orangery. 

 

The highest risk in life that we all face during our working lives is long term illness or injury. It is much more likely to happen than critical illness and much more likely than death. 

 

 

Life insurance pays out if you die. The idea is to pay your family money when you die. 

Critical illness insurance pays out if you get one of a specified number of illnesses. It pays you a lump sum cash so that you can sort out the big things in life. Income protection pays out a regular monthly sum in order to pay bills and cost of living and can be set up to pay out for 1 year, 2 years, or until the end of the policy term (say until retirement). There are various rules about how it needs to be done, so it is best to take advice on this. 

 

You can have all of the above at once. 

 

Anyone who is working, either employed or self-employed. 

 

For many people a prolonged illness or the effects of an injury means that they will be unable to work. Some employers will provide some form of sickness benefit, but this is usually limited for between one month or up to a year or so for most contracts. Many employers provide nothing at all and a large proportion of self-employed people will have no personal provision for loss of income. 

 

Income protection fills in the income gap. If you are still working full time you cannot have both employer sickness benefit and income protection insurance payments. If you are on employer sickness benefit the insurance must be set up to dovetail so that it pays out when sickness benefit stops. For example, an employment sickness benefit pays for three months, then the income insurance starts when the employer sickness benefit stops. If there is nothing then some providers will start the benefit within a matter of days of being signed off.  

 

There are limits to how much benefit will be paid by an insurer based on gross annual income, this is usually between 55% and 65% of income depending on the insurance company. 

 

When you go back to work full time the insurance ceases paying, but if you are ill again most policies will kick in again if you’re signed off again. 

 

Loss of employment can be managed by a reduced level of cover for some providers. 

Returning to work on a lower income can be supplemented with some policies. 

 

If there is an increase or decrease in salary, the policy can usually be adjusted to accommodate. 

 

The highest risk in life that we all face during our working lives is long term illness or injury. It is much more likely to happen than critical illness and much more likely than death, so it should be the first consideration for anyone who needs to take care of themselves and their family and has to rely on earned income to do so. For most people income protection should be the first insurance to set up before critical illness and death because the likelihood of it being needed is the highest of all.