Income protection premiums are calculated based on a combination of your age, job, current state of health, and level of cover, meaning that premiums for income protection are different for everyone. If you are a 21 year old administrator, in perfect health looking for £500 cover per month, your premiums will naturally be very low! However, if you do not fall into this category, and are initially alarmed at how much income protection will actually cost you, there are always ways that you can cut down your monthly premium…
1) Extending the ‘Deferred Period’…the policy deferred period is the time between a claim being made, and the policy benefits being paid out. The minimum deferred period you can generally get is 1 month, which will bring the highest premiums along with it. If you want to save money on your monthly premium, you can extend this deferred period (to 2 months, 3 months, 6 months, or 12 months). Although this will mean that you will have to wait a bit longer for you money if you have to make a long term claim, it will drastically decrease your premium. Make sure you are comfortable using any savings during this time however!
2) Decrease the payout period…If you are on a very tight budget but having some form of cover is important to you, then it is well worth considering an income protection policy with a short-term payout period (1 year/2 years). Typically, income protection will pay you all the way until you retire if you are unable to ever return to work, however, if you are happy to sacrifice this aspect of the cover and opt for a 1 or 2 year maximum payout, then this will bring considerably lower premiums with it.
3) Lower the finishing age on your policy…because income protection policies can potentially pay you all the way until retirement if you are too ill to ever work again, having a finishing age of 65/70 can add extra cost to your premium. If you are comfortable with having a policy that will only cover you to age 60 for example, this will eliminate the 5 highest claim risk years from your policy, therefore giving you a lower premium.
4) Take a policy with a ‘Reviewable’ premium…this option is not ideal, as your premiums will be subject to discretionary future increases, particularly as you get older…however, if you are on a tight budget right now, but anticipate having greater disposable income in the future, opting for a policy with reviewable premiums will save you around 10% on the monthly premium. You can then change this over to a guaranteed premium in the future, where your premium will then be fixed for the lifetime of the policy.
5) Lower your level of cover…this may sound obvious, but premiums are always going to be lower if the insurance company has to pay you less. Would your personal outgoings stay the same if you were out of work? Consider whether or not you could survive on slightly less if you aren’t commuting to work etc and lower your level of cover for lower premiums…
We recommend you speak to a financial adviser if you are considering taking out income protection to ensure your cover is suitable.