Income Protection Insurance: How to Pay Less for Your Policy

Income Protection Insurance will give you peace of mind that should you be unable to work, you'll still be able to afford your living expenses. We explain what you need to know before buying Income Protection Insurance.

What is Income Protection Insurance?

Income Insurance typically provides you with cover should you lose your income through an accident, sickness, or unemployment.

Knowing that your income is protected will help to give you peace of mind that you’ll always have money enough to live on should you be unable to work.

Income protection insurance works by paying you a regular sum for a set period of time after you place a claim. It is typically paid as a lump sum each month instead of being tied to a particular debt such as your mortgage.

Who is Income Protection Insurance suitable for?

Income Protection Insurance is by no means essential or something that every working person must commit to, and there’s no obligation to buy it at any particular point in your life. However an income protection policy could prove invaluable if you fall ill, have an accident that incapacitates you, or face redundancy or unemployment.

If nothing else, income insurance will provide you and your family with the security of knowing that if the worst happened you would still have some money coming in to cover your day to day living costs. This is particularly useful if you have little in the way of savings or another source of household income to fall back.

For example, if you are an employee and become ill or have an accident that prevents you from working for at least four days in a row, you’ll be entitled to up to 28 weeks of statutory sick pay if your employer doesn’t have a sick leave payment scheme of their own in place (your work contract should set out what you’re entitled to).

This means that you’re guaranteed to have a source of income for a few months after becoming ill, but if you are still unable to work after that point, you would have to turn to state benefits.

However, it’s worth noting that at just £79.15 a week, statutory sick pay is unlikely to be enough to cover your basic living expenses. Likewise if you lose your job through redundancy you may be entitled to statutory redundancy pay for a limited time, but this won’t usually be enough to replace your income completely and would not help if your unemployment was not due to redundancy.

This kind of temporary pay carries no guarantee that it will tide you over until you find another job, which leaves you at the risk of having to severely cut down on the amount you spend – and could lead to you having to default on your mortgage payments which would put your home in jeopardy.

Although there are several benefits you may be able to claim if you were unable to earn your own income, existing on these alone is unlikely to bring in enough money for you to maintain your current lifestyle. This is where income insurance comes in – it will aim to return you to the same financial status you enjoyed while you were able to work.

If you’re trying to cut costs income protection cover may seem like an unnecessary extra, but if you shop around for a decent policy that provides you with the cover you need at a price you can afford, then it can be worthwhile having the back-up in place should you need it.

Having some kind of income protection cover in place can be particularly valuable if you are self-employed, because you will be less likely to be able to cover the cost of living if you fall ill and can no longer work.

This is because you won’t be in receipt of any statutory sick pay and won’t be part of any employee-related insurance schemes. In this case a regular payout from your salary insurance policy will help to replace money you previously earned through self-employment.

What should I look for in an Income Protection Insurance policy?

Usually the maximum amount you’ll be able to claim through an Income Protection policy is equivalent to the salary that you were earning after tax, minus the benefits that you’ll now be able to claim, although this does vary from provider to provider.

When you take out a policy you should be able to specify how much cover you need a month, generally up to 70% of your income – so you’ll need to think about how much you would need to cover your living expenses if you were no longer receiving a salary.

Once you make a claim your loss of income insurance will continue to pay out until the date you have selected for your cover to end, or the date that you return to work if this is sooner. Many policies limit their maximum claim period to 1 or 2 years while other, more expensive policies, will offer to pay out indefinitely if you are unable to return to work for a sustained period - this tends to be for accident and sickness policies only. Again, you’ll need to balance the income reassurance you require with affordability when choosing a policy.

There will also be a waiting period between when you first place a claim and when the policy will start paying out – 30, 60, or 90 days is typical – so this is something to take into account when choosing your policy. If you have savings that will tide you over for a couple of months then a longer wait wouldn’t be too much of a problem for your day to day finances. However, if you have little in the way of financial backup then opting for a policy that pays quickly could be a wise choice.

It is also a good idea to look for a policy that backdates any claims to the first day you became unable to work. These will provide you with the most reassurance that you’ll be able to cover costs on an ongoing basis, even if you have to wait 30 days or so to receive the benefit. Be sure to compare income protection insurance and shop around to secure the best income insurance for your needs.

Most Income Protection Insurance products will specify a minimum and maximum age at which you can apply. The minimum age is normally 18 and the maximum usually extends to an average retirement age – around 60 years old.

Different Income Protection Insurance policies will have different restrictions, allowances and exclusions in place, so it is important to shop around and compare the features, benefits and terms and conditions of any salary insurance policy that seems suitable before making a decision – getting more than one income protection quote is essential.

You can use our Income Protection comparison which will allow you to carry out a comparison of the detailed terms and conditions from the results table.

Make sure you check the small print of the policies available to find out under what circumstances they would settle a claim. Some policies will only pay out if you find yourself unable to do any sort of work whatsoever, meaning you would have to be seriously incapacitated to qualify.

In contrast other policies will pay out if you are unable to do the line of work you carried out prior to your loss of income, so this is something worth checking before you settle on an income protection policy.

How much does Income Protection Insurance cost?

While ultimately the cost of insuring your income will depend on the provider you choose and the type of cover you require, the cost of your premiums will also be based on a few common factors:

Amount of income protected – the amount of money that you want to cover with salary insurance will have an effect on how much you pay in premiums. The higher the sum you wish to insure, the more it is likely to cost you in premiums.

Length of policy – you can usually select the length of time you would like your policy to pay out for in order to replace your income until you can support yourself again. Naturally the longer you wish the policy to pay out for, the more you’re likely to pay in premiums to justify this larger pay-out.

Waiting period – there will be a length of time between making a claim and the policy beginning to pay out to replace your income. The shorter you want this waiting period to be, the more you’re likely to pay in premiums.

Backdated claims – if you are making a claim that is backdated, i.e. you wish your income protection policy to pay out from the point at which you became ill or were made redundant, this is another thing that can affect how much you’ll pay in premiums.

Other benefits – if, as result of losing your income, you can now claim benefits such as Income Support, this will also have an effect on whether your policy will pay out.

Occupation – some jobs will be seen by a potential insurer as a greater risk than others, and more likely to contribute to an illness or cause an accident, or more vulnerable to redundancy for which you would make a claim. If you work as a stunt person, for example, you’re likely to be charged higher premiums than if you work as an office clerk.

Age – the older you are, the higher your premiums are likely to be because statistically you are more likely to fall ill to the point that you are unable to work.

Health – if you have pre-existing health conditions it’s possible that a potential insurer will decide not pay out for claims relating to these conditions; however, you should still be able to take out cover. Nevertheless, the healthier you are, the more likely you are to secure lower premiums.

Lifestyle – whether or not you smoke can sometimes play a role in the amount you’ll pay in premiums as some insurers will offer preferential rates for non-smokers.

As with any type of insurance where the cost of premiums is proportionate to risk, it’s worth checking what different insurers define as ‘high-risk’. Different insurers may put the same job in different risk categories, so it is always worth getting more than just one income protection quote to compare.

What else should I consider?

Income Protection Insurance won’t necessarily cover you against every possible case of illness, accident, or unemployment, so it shouldn’t be seen as a catch-all insurance that will pay out if you are unable to work for all reasons.

Because of this it’s important to check potential policy exclusions and ensure you are happy with these before signing up.

What’s the best way to buy Income Protection Insurance?

When you’ve decided that you’d like to take out Income Protection Insurance, you should first do some research into the range of policies on the market to see what is available and what sort of cover might suit you.

By comparing different income protection insurance policies and policy providers, you’ll be able to get a good idea of what price you can expect to pay and how well covered you will be before you commit.

As tedious as it can be, reading the small print is essential when buying this type of insurance policy. One clause in your agreement could mean the difference between being able to claim and being without the income protection cover you thought you’d bought.

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How to Beat Inflation.

                                 What does it mean to say saving accounts 'beat inflation'?

As the cost of living rises, making savings pay can feel like fighting an uphill battle.

But you can beat inflation: here's how.

Why inflation matters

Inflation is a measure of the rising the cost of living.

There are two major inflation indexes, the consumer price index (CPI) and retail prices index (RPI).

Both look at the cost of a 'typical' shopping basket (RPI includes extras like the cost of paying a mortgage) and compare its cost with the what it would have been 12 months ago.

If inflation is 4% then the typical basket is 4% more expensive than it was in the same month a year ago.

The impact on savings

Inflation hurts day to day when it rises faster than wages. The same amount of money buys less.

For savers it hurts in the same way - a pot of cash will be worth less than when you put it aside - except that savers can 'beat' inflation with an interest rate that allows the amount to keep up with real prices.

With a 2.5% inflation rate, for example, a basic rate taxpayer needs an account paying at least 3.12% because, taking 20% income tax into account, that's a 2.5% return.

Inflation rates now

Earlier this year savers has reason to be concerned.

In March RPI shot up to 3.5% and there were very few, if any, accounts offering savers a real return.

Since then, though, we've been relieved to RPI fall to 3% in April and hover around where it is now, 2.9%, over the past few months.

CPI has also fallen in the same period and is now well on track to meet the Treasury's target of 2%.

According to Moneyfacts, that means that 198 accounts can beat inflation this month.

How to beat inflation

Inflation beating savings are likely to be individual savings accounts (ISAs), where interest is paid tax free, or fixed rate accounts, where the savings are not easily accessible.

ISA's are particularly useful in this sense because the account interest rate needs to be just above the inflation rate to beat inflation, you don't need to take tax into account.

Usually, however, tax will reduce an account's return. So, as we saw above, as we update this article, account holders will need a 3.12% rate in order to beat rising rates after basic rate tax.

Long term fixed rates can often do this job, though inflation linked accounts may be worth considering too.

Let's take a closer look.

First port of call: ISAs

Bear in mind there are restrictions on the amount that can be invested in cash ISAs so this limits the eventual rate of return.

As always, those prepared to store their money away longer term can get the highest rates but will need to take a gamble on possible future ISA rates.

Bear in mind that, currently at least, even a few fairly accessible ISAs can just about beat inflation, though.

Fixed rates

Of course, those with a large amount of savings may want to invest the rest in another pot.

That means taking a look at fixed rate accounts.

These accounts can offer quite high interest rates. However, bear in mind that this option often requires putting away at least £1,000 and not being able to touch the money for a minimum of two years.

The trick with any of these accounts where you are agreeing to a fixed savings term is double and triple checking the conditions.

You don't want to be stung by penalties for taking out your money too early or making too many withdrawals.

Inflation linked rates

The downside to a fixed rate, however, is that it's just that - fixed - if inflation were to increase substantially the account could end up losing money again.

For that reason some people prefer accounts that offer an interest rate that increases as inflation does.

This usually works in the form of a promise to pay either RPI + interest or a fixed rate, whichever is higher, at the end of an account's life, guaranteeing a return even in the case of deflation.

The problems with these accounts are generally the same as with fixed rates - they require a large initial investment and put strict restrictions on withdrawals - with one additional problem: they're thin on the ground.

At the time of writing, there's just one account open to new applicants.

A note on pensions

It's worth noting at this point that inflation is usually associated with one form of saving in particular: pensions.

This make sense, of course, because you really want to be able to live on the cash you put away.

So many pensions schemes promise to beat inflation and, in return, ask account holders to receive most of the pensions pot in the form of an annuity, like a salary, once holders reach a set age.

Just like a salary, that annuity will be taxed so it's unsurprising, as many expect tax to rise and people to work longer, that many are choosing to put less in their pensions and more in ISAs and other more flexible savings accounts.

We don't cover pensions so take a look at our useful links above for more information on this elsewhere.

Debt vs savings

Finally, it's fair to say that there's a big group of people who really shouldn't be stressing about whether their savings are beating inflation: those with debts.

Investing in savings is great but it is possible that what it's offering is actually a false sense of security.

With currently low interest rates on money stashed away, paying off debt before saving is often the better choice.

We can see this just by numbers. A 3% saving rate will never beat a 15% rate paid for a credit card debt.

Having said that, those that can't, for some reason, find an inflation busting savings account shouldn't be put off saving altogether.

It's always useful to have a safety pot tucked away should you need it in the future especially if the alternative might be borrowing money, a much more expensive option in the long run.

Explaining stocks and the stock market

                                        Explaining stocks and the stock market
             Stocks are more than just a piece of paper (and sometimes not even that)

At some point, just about every company needs to raise money, whether to open up a West Coast sales office, build a factory, or hire a crop of engineers.

In each case, they have two choices: 1) Borrow the money, or 2) raise it from investors by selling them a stake (issuing shares of stock) in the company.

When you own a share of stock, you are a part owner in the company with a claim (however small it may be) on every asset and every penny in earnings.

Individual stock buyers rarely think like owners, and it's not as if they actually have a say in how things are done.

Nevertheless, it's that ownership structure that gives a stock its value. If stockowners didn't have a claim on earnings, then stock certificates would be worth no more than the paper they're printed on. As a company's earnings improve, investors are willing to pay more for the stock.

Over time, stocks in general have been solid investments. That is, as the economy has grown, so too have corporate earnings, and so have stock prices.

Since 1926, the average large stock has returned close to 10% a year. If you're saving for retirement, that's a pretty good deal -- much better than U.S. savings bonds, or stashing cash under your mattress.

Of course, "over time" is a relative term. As any stock investor knows, prolonged bear markets can decimate a portfolio.

Since World War II, Wall Street has endured several bear markets -- defined as a sustained decline of more than 20% in the value of the Dow Jones Industrial Average.

Bull markets eventually follow these downturns, but again, the term "eventually" offers small sustenance in the midst of the downdraft.

The point to consider, then, is that investing must be considered a long-term endeavor if it is to be successful. In order to endure the pain of a bear market, you need to have a stake in the game when the tables turn positive.

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Tips for investing in stocks

                                                        Tips for investing in stocks

1. Stocks aren't just pieces of paper.

When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings.

2. There are many different kinds of stocks.

The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example.

3. Stock prices track earnings.

Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock's price will go up, down or sideways.

4. Stocks are your best shot for getting a return over and above the pace of inflation.

Since the end of World War II, through many ups and downs, the average large stock has returned close to 10% a year -- well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

5. Individual stocks are not the market.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

6. A great track record does not guarantee strong performance in the future.

Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip.

7. You can't tell how expensive a stock is by looking only at its price.

Because a stock's value depends on earnings, a $100 stock can be cheap if the company's earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim.

8. Investors compare stock prices to other factors to assess value.

To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company's performance expectations to those of its industry is also common -- firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

9. A smart portfolio positioned for long-term growth includes strong stocks from different industries.

As a general rule, it's best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

10. It's smarter to buy and hold good stocks than to engage in rapid-fire trading.

The cost of trading has dropped dramatically -- it's easy to find commissions for less than $10 a trade. But there are other costs to trading -- including mark-ups by brokers and higher taxes for short-term trades -- that stack the odds against traders. What's more, active trading requires paying close attention to stock-price fluctuations. That's not so easy to do if you've got a full-time job elsewhere. And it's especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wracking.

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Why Use a Financial Advisor?

                                                     Why Use a Financial Advisor?

In today's world, proper financial planning is more important than ever!

With increasingly complex financial markets, longer life expectancies and uncertainty about Social Security and long-term health care coverage, choosing the right investments could play a critical role in helping to secure your financial future.

With more than 10,000 different investments and funds to choose from, one of the most important decisions you can make about your future is to seek the advice of a qualified investment professional.

Studies by various financial services research organization, show that using a professional investment advisor may help you achieve your financial goals.

The studies found that investors who purchased equity and fixed-income funds through professional investment advisors achieved higher returns than those who purchased funds on their own.

According to the studies, investors who paid a sales load were more likely to hold onto their investments during periods of market decline - by an average of 1.3 years more than investors who did not seek advice or purchased a no load fund.

Investors who stayed invested longer enhanced their ability to increase their long-term returns, versus investors who changed their investments more frequently.

It is your financial professional's business to get to know who you are and what you want to achieve with your investments. Whether you're investing toward a secure retirement, starting a college savings plan for a child, or simply interested in accumulating additional assets for future needs, it's your financial professional's job to help you clearly define both your short- and long-term goals.

After identifying your goals, you and your financial advisor will be able to create a plan that suits your needs, your risk tolerance and your time horizon, putting you in a better position to achieve these goals.

One of the most important steps to achieving any goal is to develop a plan. 

When investing toward financial goals, an important part of your plan will be to diversify your assets among stocks, bonds, short-term investments and possibly foreign securities.

Based on your needs, your financial professional can develop an asset allocation strategy that can help lower your overall risk by increasing your exposure to a greater number of investment opportunities.

Once you've determined the best way to allocate your assets, you still have the important task of selecting the right investments for your portfolio.

With thousands of investments to choose from, finding the right one, or combination of investments, can have a significant impact on your degree of success.

Your financial advisor has the knowledge and resources necessary to help you find the investments that best suit your needs.

The benefits of working with a financial professional don't end with your first investment!

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What is asset allocation?

                                                       What is asset allocation?

Got two nickels to rub together? Keep them in separate pockets.

For example, many people loaded up on technology stocks in the late 1990s. When the market corrected in 2000, many of these investors experienced steep losses.

Asset allocation is about not putting all your eggs in one basket. It's the ultimate protection should things go wrong in one investment class or sector, as is likely to be the case from time to time.

Or, you may put your money into bonds, among the safest of investments. Yet the bond market, too, has its up and down swings. Disgusted with that market, you put your money in a money market account. However, though virtually bomb proof, this market provides far lower returns. After all, less risk means lower rewards. And even modest inflation steadily erodes the value of your cash.

Moreover, a bad year in the stock market may show up as nothing more than an insignificant blip by 2015 or certainly by 2025. This is because the stock market is historically the best long-term investment vehicle - one that can deliver an average return of roughly 10% annually for those willing to stick it out for the long haul.

In the short term, however, the stock market is more volatile than other investments. Consequently, investors with less risk tolerance - and this generally includes people who are close to retirement age - should put less money into the stock market and invest more in bonds. Younger people, however, can take on more risk because they have a longer investing horizon.

Your risk tolerance and goals will determine how much you put into each of the three investment categories. If you make careful choices with your asset allocation, you'll earn better returns without losing sleep.

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QROPS and pensions: advice for expats

                       QROPS and pensions: advice for expats

British expats abroad can now get more control over their pension’s plans, thanks to new rules that remove many restrictions for people who retire overseas.

 

They can pay lower tax on income drawn from a relatively new form of pension, avoid being forced to invest capital in an annuity which dies with the purchaser and pass their wealth to friends and family free of tax on death.

 

Needless to say, these important new opportunities are subject to extensive legislation, which will be discussed in detail later. However, the important point for now is that a Qualifying Recognised Pension Scheme (QROPS) can enable savers to enjoy the best of both worlds.

 

You can receive valuable tax reliefs while working and saving toward retirement in the United Kingdom, without needing to pay higher taxes when you draw benefits or submit to UK restrictions on how you invest and spend the fund

                                                  

What is a Qualifying Recognised Overseas Pension Scheme (QROPS)?

As its name suggests, this is a form of pension based outside the UK which is recognized by the British authorities as being eligible to receive transfers from registered UK pensions. Reputable advisers will only recommend transfers to countries which provide consumer protection equivalent or greater than the safeguards in the UK.

People who are living inside or outside the UK can transfer their deferred company and personal pensions to a QROPS. Any pension can be transferred as long as an annuity has not been purchased or, if it’s a final salary scheme that the pension has not commenced.

Better still, where the pensioner has not been resident in the UK for five complete and consecutive fiscal years – and the tax rules determining residence will be examined in detail later in this guide – HMRC restrictions on how income and capital are spent no longer apply.

For example, as set out in Clause 2 Schedule 34 of the Finance Act 2004, there is no need to report what HMRC would regard as “unauthorised payments” and tax of up to 82 per cent that might be levied on such payments in the UK can be avoided. However, it is important to understand this does not mean trust busting is acceptable.

Who might benefit from considering a QROPS?

Anyone considering retiring overseas and becoming resident in a foreign jurisdiction or country for five years or more. The amount of tax you pay on income and capital received from your QROPS will be determined by the taxation of the country in which it is based and you are resident.

These laws or fiscal statutes vary from country to country but many are more favourable to pensioners than those in the UK.

For example, pensioners resident in Cyprus can opt to pay a fixed flat rate of five per cent tax on all income above a small tax-free band or personal allowance; alternatively, they can choose to receive a higher personal allowance and pay higher rates of income tax on any income in excess of the allowance.

The best option for you will depend on your personal circumstances and it makes sense to take professional advice which can take account of your individual needs and objectives.

British pensions that can be transferred to a QROPS include former employers’ occupational schemes (but not final salary or defined benefit schemes already in payment); Superannuation Schemes; Executive Pension Schemes; Self Invested Personal Pension Schemes (SIPPSs); Small Self Administered Schemes (SSASs); Section 226 Personal Pension Schemes; Section 32 Pension Transfers and Personal Pensions. You cannot transfer British Government or State pensions to a QROPS.

Do I need to leave the UK forever to benefit from QROPS?

No. Rising numbers of people who decide to retire overseas – perhaps to enjoy better weather and a lower cost of living – can take advantage of a QROPS. You can continue to visit friends and family or return to Britain for any reason, provided you remain a non tax resident of the UK. So, you could return to the UK whenever you wish but the maximum length of time you can spend in Britain will be limited before UK taxes apply.

For example, you must beware of the six-month rule and the three-month average rule to avoid becoming resident in the UK again for tax purposes and losing the advantages of QROPS.

If you are present in the UK for 183 days or more in any tax year – which starts on April 6 and ends on April 5 – or you are present in the UK for an average of 91 days or more per annum, measured over up to four years, then you may become resident in the UK for tax purposes.

But be careful because, these days, rules are not the law. It is possible to remain a UK tax resident even if you spend less than 90 days in the UK, so it makes sense to take advice that is specific to your individual circumstances in this very tricky area.

Since April 6 2008, if an individual is present in the UK at midnight, that counts as one day’s residence. In practice, days of arrival in the UK are counted but days of departure are discounted. Where an individual arrives and departs on the same day, this will not count as a day’s residence for tax purposes

Are QROPS suitable for everyone?

No. Most British pensioners retire as UK residents and so must pay UK tax. There is no statutory limit on the minimum value of pensions that can be transferred to a QROPS but only funds worth more than £100,000 are likely to generate sufficient tax savings to justify set-up costs, which vary between one per cent and five per cent of the fund transferred.

Pensioners who have plans or policies with Guaranteed Annuity Rates (GARs) higher than returns available today, may also find QROPS do not justify giving up their GARs. As mentioned earlier, Government pensions – excluding the National Health Service scheme - British State pensions and final salary or defined benefit pensions already in payment cannot be transferred to QROPS.

Why it makes sense to take specialist advice

Given the complexity and variety of different countries’ tax laws, this guide can only serve as a general introduction to the new opportunities created by QROPS. Specialist financial advisers, who are authorised in the UK and the country to which you intend to retire, can answer questions specific to your individual circumstances.

Remember that the fundamental purpose of a pension is to provide retirement income. So, it is vital to ensure that your money does not run out before you do – and to avoid taking unnecessary risks with your income or capital. For these reasons, it makes sense to consult fully-authorised, specialist advisers before making any decisions about QROPS.

But the first step for most people will be to build up the maximum pension they can within the UK’s tax rules, and this is the subject of the next chapter.

Remember that the fundamental purpose of a pension is to provide retirement income. So it is vital to ensure that your money does not run out before you do

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