An Guide to Income Protection

Income Protection Insurance (IP) is designed to pay out whatever the reason for your being unable to work (subject to one or two exclusions) due to accident or illness. In this respect it differs from Critical Illness Cover (CIC) which only pays out if you contract one of a list of specified illnesses (even if the list is pretty long). Additionally, IP pays out for the whole period that you are unable to work; as opposed to CIC insurance, which generally pays a single larger lump sum.

IP can be called by several different names: You might hear it called Permanent Health Insurance (PHI), Income Replacement Insurance, Long Term Disability Insurance or a few other things. However, they all do the same basic job, which is to pay you an income if you become unable to work due to sickness or injury.

It obviously depends on your own circumstances whether IP insurance is necessary. As an expatriate in the Middle East, you are unlikely to continue being paid if you are off work for longer than a month. It is worth checking your employment contract to see how long your employer will provider you with sick pay should you be off work longer-term.

If you are self-employed, you really ought to buy this sort of insurance unless you have substantial savings you are prepared to eat into. 

As with all insurance, the trick to buying the right type is to consider exactly what it is that you need it to do for you. In other words, you need to have a very close look at the small print of any policy to make sure it will pay out when you want it to.

There are three main definitions of being unable to work:

• unable to do your own job

• unable to do your own job or a similar one for which you are qualified

• unable to do any kind of paid work

You need to decide whether you'd be prepared to do another, perhaps less pleasant, job if you became unable to do your current one. If so, you reduce the likelihood of needing to make a claim and the premiums should be that much lower. If you wouldn't want to have to find just any old job, the middle ground would be to go for "unable to do your own job or a similar one for which you are qualified".

However, if you are unable to do your current job, you're also unlikely to be able to do a similar job. So, the difference in premiums is not often that great and you might think it worth going for the simple "unable to do your own job" definition.

If you buy a policy with an "any occupation" clause it means that you would have to be unable to do any job. For example, a surgeon who is confined to a wheelchair would not receive any benefit if he could do any other job - for example, as a telephonist, on a much reduced salary. The policy would not pay out unless you were totally unable to do anything.

You can save quite a bit by buying a policy that makes you wait for your first payout. Delaying payments for 30 or 60 days after you are first unable to work substantially reduces chances of claiming and therefore the premium.

The longer you can afford to hold out, the cheaper it will be for you. If you can save away the money you are saving on the premium, this can be used to live on in the moratorium period. If you don't need to claim, you get the benefit of this extra cash! .

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