If you fall seriously ill tomorrow and cannot work for several months, will government support be enough to protect you and your family? Many residents of the UK think that the answer is yes, but they might be surprised to find out just how little state benefits provide.
The Function of Incapacity Benefit
Incapacity Benefit is the government's way of protecting hard-working citizens who may suddenly find themselves unable to work due to accident or illness. However, the benefit assumes that the worker already has a fairly significant amount of money in savings to draw upon during the time of crisis; the benefit provided by the government is meant only to supplement these savings, not to replace the worker's income.
Here are some important facts to understand about Incapacity Benefit:
* In 2009, the government initiated a stricter test in order to reduce the number of people eligible for Incapacity Benefit.
* As a result of the new test, the rejection rate for the benefit has risen sharply from 35% to nearly 70%.
* The long-term benefit amount is less than £92 per week.
Before you apply for Incapacity Benefit, you will be eligible for Statutory Sick Pay (SSP). This benefit pays only £75 per week.
Income Protection Insurance
By contrast to the government benefits, Income Protection Insurance (IPI) pays out a greater amount of money for a longer amount of time – in fact, depending upon your policy, you will be eligible to receive benefits for 25 – 45 years.
What an IPI policy will cover and not cover varies greatly. Generally speaking, however, an IPI policy will kick in with benefits whenever you are deemed unable to work. If you are unable to work due to physical illness, mental illness, or an accident, you will be able to claim IPI benefits. Most policies do not cover drug and alcohol abuse, self-inflicted injuries, pregnancies/childbirth, or pre-existing conditions.
How much the policy will pay also varies, but typically Income Protection Insurance will cover 50 – 75% of your monthly, pre-tax salary.
The Bottom Line
Should you take out an Income Protection Insurance policy? You should first consider your employment situation and your savings situation. If you are self-employed or working in an unstable field, you face the very real possibility of losing your income with little or no safety net to protect you.
Will government benefits, together with your savings, provide enough money to continue your current lifestyle? If the answer is no, then you should seriously consider purchasing an Income Protection Insurance policy.