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Banking 101 –

Why do I need income protection insurance?

Is income protection worth it? Find out why income protection insurance is vital in wealth planning strategies for entrepreneurs and business owners.


24th June 2021


At Arbuthnot Latham, we believe that the peace of mind that comes with protecting family lifestyle, living costs and securing children’s education and upbringing has an immeasurable value. Often having a wealth management or backup plan that secures ongoing income in the event of unforeseen circumstances is overlooked.

We take our clients’ financial wellbeing very seriously and so having the right contingency plan is very important. We consult with our clients and draw their attention to the need for insurance solutions to protect their family and/or their businesses. We make recommendations on what arrangements are most suitable.

Most clients do not think about what the implications of ill health or morbidity would be on their family circumstances or the going concern of their business. Some have not thought about a contingency plan, i.e., what would be the impact on their family if the breadwinner’s income stopped due to ill health? Would they need to draw on their long-term savings pot earmarked for retirement? How would they redeem their mortgage, or save for retirement? Who would be in charge of their business if something happened to the business owner?

Our Wealth Planners can help our clients build a strong financial plan, taking into consideration, personal and business circumstances.

What is income protection insurance?

Income protection insurance provides regular tax-free income when the life insured is unable to work due to accident/illness/injury. Plans pay out, after a deferred period, until a specific event such as return to work, retirement, death or when the policy ends. Some polices may cover long-term illness or disability.

Generally, income protection Insurance will pay ongoing income equivalent to 50%/60% of your average gross income. This is usually paid monthly and is tax-free. The idea is that the cover would provide monthly payments to cover lost earnings, helping you maintain your lifestyle while you’re away from work.

It is important to note that neither income protection or short-term income protection pay out if you're made redundant - but policies will often provide 'back-to-work' help if you have been on sick leave. Unemployment cover can be arranged using separate insurance.  Income protection is different from critical illness insurance, which pays out a lump sum if you suffer a defined illness.

Executive Senior Staff remuneration income is usually made up of more than pay and bonus. It likely encompasses other monetary elements including pension contributions, dividends, commission and even overtime. When staff are unable to work due to illness or injury, they may not be able to meet their basic income needs. Financial security is important to them and their family. Executive income protection is designed for owners and high-earning employees of SMEs. The insurance company pays any claim proceeds directly to the employer. They then pay the insured person via PAYE. Cover can include employer pension contributions, and national insurance contributions.

Is income protection insurance worth it?

Only a minority of employers support their staff for more than a year if they are absent due to ill health. Given the low level of state benefits available, everyone of working age should consider taking advice as to the right amount of income protection.

Someone’s ability to generate a regular income is arguably their biggest asset; this is what they will rely on to look after their family, stay on top of their monthly bills and live the life they are accustomed to. We can help clients secure a percentage of their gross salary to give them peace of mind in case they are unable to work for an extended period due to accident or illness. The right shape and size of a policy is very important, and consideration should be given to additional benefits such as rehabilitation and proportionate benefit, accidental death benefit, lump sum death payment and waiver of premium.

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Protecting loved ones, dependent family

Covid has shown us all that so much can change so quickly. Ultimately, we would want our clients to feel secure with the knowledge that they have the right contingency plan in place, should they suffer an illness or prematurely die. Is their mortgage redemption and ongoing income position protected should they fall ill or prematurely die? Income protection insurance only pays out a proportion of a person’s previous earnings during an illness, yet their financial needs may be greater in illness than in health. Critical Illness Cover can help to bridge the financial gap.

If appropriate, we could consider if it is the right time for us to introduce you to a member of our Wealth Planning team to address any gaps or shortfalls in your contingency plans. We offer a Wealth Planning service as part of our relationship proposition. Our highly qualified and experienced advisers can determine the right wealth planning strategy specifically tailored to you and your needs, including ensuring that your family are protected should particular unforeseen circumstances arise.

Discover more income and wealth planning strategies to help you plan for tomorrow. 


Becoming a client

Take control of your finances today by completing our enquiry form. Alternatively, you can call us on the number below and one of our team will be more than happy to talk about your future.

+44 (0)20 7012 2500

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