Short Term vs Long-Term Income Protection Insurance

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Income Protection Insurance

In a world trying to adjust to the new normal after the COVID-19 pandemic, many have resorted to securing financial protection to protect themselves and their loved ones.

While the UK government took action to help those greatly affected by the pandemic with furlough and self-employed income support schemes, these have now ended and many have been wondering how they can further protect themselves for the future.

One product, in particular, has become increasingly popular amongst the UK workforce, and that’s income protection.

The leading insurer, Zurich, found that since the pandemic hit interest in income protection has increased by a third. Their research shows that COVID-19 is driving further demand for financial advice and protection.

But is short-term or long-term income protection the better option?

Award-winning life insurance broker, Reassured – Income Protection, explains both options to help you make an informed decision.

What is income protection?

Income protection is an insurance policy that will make regular, monthly, payments to you in the event that you become too ill or injured to work.

The amount paid out to you can be up to 70% of your usual income and you can receive these payments until you’re well enough to return to work. With some policies, it can be possible to make multiple claims throughout the policy’s lifetime.

Unlike other forms of financial protection, income protection payments will not begin straight away. Instead, you will need to wait for a ‘deferred’ or ‘waiting’ period to pass.

In terms of income protection, this refers to the time in between your first sick day and when your payments begin.

If you’re still unable to work after your deferred period has passed, payments will commence and will continue until you’re well enough to return to work, until the payment period comes to an end, until the policy expires, or until you retire (whichever happens first).

Income protection key facts:

  • Pays out between 50% – 70% of your usual income
  • Will pay out due to accident or sickness
  • Payments are monthly and tax-free
  • Policies can be short term or long term

What’s the difference between short-term and long-term income protection?

Short term income protection and long-term income protection actually work in exactly the same way. The only key difference is how long the policy will payout to you.

As the name suggests, short-term income protection pays out for a much shorter time than long-term income protection. With short-term income protection, policies tend to have a maximum payment period of up to two years, whereas long-term income protection can payout to you up until you reach retirement.

Both options will pay out up to 70% of your usual income and will cover you for accidents and sickness. You will also be able to choose the definition of incapacity you would like to be covered for, as well as which premium payment type you would like.

Short term income protection can often be confused with other budget policy options on the market, such as Accident, Sickness, and Unemployment (ASU) which will pay out to you if you involuntarily lose your job, but a standard short term income protection policy won’t cover any form of unemployment.

What does income protection cover?

Becoming unable to work is an extremely stressful situation, but income protection (both short-term and long-term) can be used to cover a range of financial commitments, allowing you to continue your current lifestyle.

Income protection payments can help to cover:

  • Monthly rent or mortgage payments
  • Household bills and utilities
  • Debt or loan payments (such as credit card bills, car finance etc)
  • Daily living costs
  • Travel costs (public transport, petrol/diesel)
  • Other essential costs (phone contract, food shop)
  • Leisure costs

Income protection payments aren’t tied to specific financial commitments so, whatever your usual income would cover, income protection can help to provide the funds.

How do I choose between short-term and long-term income protection?

The main question you can ask yourself when deciding between short-term and long-term income protection is how long you would like to be covered? As the only key difference is how long you will receive payments for.

For those who want coverage in place ‘just in case’, a shorter-term policy may suffice. But those wanting cover to last throughout their working life will be better suited to a long-term policy.

There are a variety of questions you can ask yourself to help determine whether you would most likely benefit from having short- or long-term income protection.

FAQ

Are you employed or self-employed?

Those who are self-employed won’t have the benefit of receiving sick pay to help ease any financial stress when too ill or injured to work. Without the right financial protection, this could lead to a devastating loss of income. For this reason, self-employed workers may benefit from longer-term cover, acting as a ‘sick pay’ alternative to protect them throughout their whole working life.

Do you receive sick pay?

If you receive sick pay from an employer, this may minimize the amount of cover you need and can help you to determine how long your deferred period should be (for example, you may want to have your payments commence when your sick pay comes to an end). Depending on other personal factors, those who do receive sick pay may only need shorter-term cover to ‘top up’ their sick pay benefit.

How long will you receive sick pay for and how much? 

Not everyone will have the same sick pay benefits. Some employers will simply offer statutory sick pay, whereas others may have their own company schemes. Finding out exactly what you’re entitled to can help you estimate whether this amount and how long you’ll receive it, would be sufficient to cover all of your financial commitments if you were unable to work. You can find out what your sick pay entitlement is by checking your employment contract or consulting your employer.

Do you have personal savings?

Having personal savings can also help to minimize the amount of cover you require as these funds can help you to continue living your current lifestyle alongside sick pay (if you receive this benefit). However, a shocking amount of the UK population is living without any savings at all. Longer-term cover can help to ensure that you won’t have to rely on your own funds if you were unable to work due to an accident or sickness.

Do you have any other sources of income?

If you have a partner and have a dual income, it may be possible for you to continue covering your financial commitments with their income (alongside sick pay if you receive this) while you’re unable to work. Having a short-term policy can help to lessen the financial burden of your partner.

Do you have a lot of financial commitments?

For those who have a wide range of financial obligations to think about (for example, future family living costs, a mortgage, car finance, loans, etc) longer-term cover may be a wise option to ensure all these commitments can be paid for. A short-term policy is only likely to pay out for two years, whereas mortgage repayments and loans are likely to last much for much longer.

What is my available budget?

Due to the shorter payment period, short-term income protection policies tend to be cheaper so, if you’re on a tight budget but want some form of cover in place, you may wish to opt for a short-term policy.

Ultimately, the option that is best for you will depend on your personal circumstances. Talking through your needs with an expert can help you to understand what options are available and which is likely to meet your needs and fit within your budget.

If the last two years have taught us anything it is that it is best to be prepared for a worst-case scenario, especially if you have dependents who rely of your income.