Income protection is a form of insurance that pays an income to replace your earnings if you are unable to work due to ill health.
Many of the doctors we meet have existing income protection contracts. Doctors can be high earners but especially in the early stages of their career may have a young family to support, a relatively large mortgage, and relatively little accumulated savings. Understandably in these circumstances loss of the income on which they are so reliant is a big concern and income protection insures against that risk.
On review of their contracts, however, we can find that doctors are over-insured. Often they have taken out the maximum level of income protection available but are not aware that the insurer will cap the payout so that the total value of their replacement income plus any sick pay is not more than around 50-60% of their usual earnings. Even if you are paying for insurance of £4,000 a month, if in the event of a claim the insurer judges that you only require £2,000 a month to take you up to 50-60% of your lost earnings they will pay out the lower amount. This is for two reasons: firstly, the insurance payouts are not taxable so the insurance will look to replace post-tax income. Secondly, the insurer does not want you to be better off out of work as this might delay your return to work (and hence increase the length of your claim).
Doctors who are over-insured are therefore paying extra for cover they can’t claim. Key points to watch out for are:
- NHS doctors typically receive sick pay of full pay for six months then half pay for a further six months in the event of illness. Most doctors therefore don’t require income protection insurance to start paying out until they are off work for more than twelve months. If the current contract is set up to start paying out sooner, this could be a trigger to review the cover.
- Doctors may have taken out income protection when they were working full time but have since reduced their hours. If the cover is based on the full time earnings, this would be another trigger to review the cover.
Please note this article does not constitute financial advice and protection needs vary depending on individual circumstances. For personalised advice on income protection and/or a review of your existing contracts please contact Richard Higgs CFP FPFS on 0117 966 5699 or firstname.lastname@example.org.