Recently we have been receiving more and more enquiries from doctors and dentists about protection and in particular, income protection – Could this be due to the fragile times in which we live?
Let me dispel some inaccurate conceptions that have been doing the rounds regarding income protection, as these rumours could be preventing you from picking up the most vital tool in your financial toolbox.
But first, back to basics…
What is income protection?
Income protection is a replacement income paid to you if you’re unable to work due to injury or illness. If you return to work, the income protection stops. However, if you are unable to return, income protection will continue to pay you an income until your retirement age.
This is not to be confused with a critical illness policy, which is a lump sum paid if you fall seriously ill. Both are both paid tax-free.
Locums, please beware income protection is not, as I was recently asked, a policy designed to pay you an income if you cannot find a session as a locum.
Let’s look at things to consider when taking out an income protection policy…
Are all income protection policies the same?
There is a country mile between a basic income protection policy and one that will offer you the security you need as a medic or dentist.
At its worst income protection can be a monthly direct debit that is as much use as a chocolate teapot…. At it’s best income protection will offer you the breathing space at the worst of times, to pay for ‘life’ so you can concentrate on getting well again, safeguarding your future goals and dreams, by guaranteeing an income stream until retirement age or you return to work.
Options to consider
Guaranteed or reviewable premiums? Own occupation or any? 2-year payout or full-term? Or, Index linking? The options are seemingly endless…without rapidly writing a short novel there are too many to detail.
Options can quickly become confusing, and a bit of a minefield without the right guidance. It’s an issue for all occupations but particularly for medics. Your jobs are very specific. Your protection needs to be equally so, or it will not be fit for purpose!
Who needs income protection?
Sick pay varies depending on what type of doctor or dentist you are. As hospital doctors, you work your way towards a maximum of 6 months full pay and 6 months ½ pay after 5 years of continuous service. Salaried GPs could benefit from the same sick pay arrangement. GP partners tend to benefit from 12 months of guaranteed drawings, minus a liability for a locum. But locum GPs attract no sick pay at all. Your sick pay as a dentist can vary and is more limited than your medical counterparts.
For those of you with some form of formal sick pay, income protection should dovetail in with this. Anyone with little or no sick pay needs to think in terms of how long you can survive on savings if your income stops.
I usually suggest working out your fixed monthly costs and comparing this to your available cash savings. Recent times, particularly for locums and dentists, have given us an experience of how fast savings deplete when income reduces. Your ‘buffer’ is often smaller than you think and runs out fast.
You have the choice of ‘deferment’, meaning how long you want to wait after being unable to work because of illness or injury before you start receiving the benefit from the policy.
I’ve heard a few myths recently relating to who needs income protection, these include:
‘You only need income protection if you have kids’.
Yes, kids are expensive, but we all need money to live. Unless you have an alternative way of funding yourself if you can’t work then kids or no kids you need income protection.
‘It’s only needed if they’re working in the last ten years of their career.’
What if you never get to the last 10 years and aren’t able to practice anymore because of illness? In the last 10 years of your career, although not ideal, you do have the early retirement or ill health retirement options if you are a member of the NHS Pension scheme and qualify. But what if you fall ill, or have an injury when you are younger? How will you fund your ‘future’ if you have zero income? Let alone potentially fund a more complicated life caused by illness so severe it stops you from practising.
‘Unless you have an income of over £100,000, there’s no point having income protection.’
If you earn £30,000, £50,000 or more you will still have expenses, and if you have lost your income how will you be able to pay for them? The more you earn, the more income protection you can hold, and this will, of course, cost you more each month. But the need and principal is the same irrespective of your level of earnings.
Can I get income protection at any age?
There is often a maximum age you can start an income protection policy. Usually, this is 59. The latest possible terminating age is also stipulated. Again, the most common one is 71.
Can I get income protection in the middle of a pandemic?
I’m not sure where the rumour came from that it’s now impossible to get income protection due to COVID-19, but we have been putting these policies in place throughout the COVID crisis.
Yes, there have been some alterations to the questions asked at the point of application, and those who have something in their medical history that warrants further information from a GP are understandably slightly slower, but the vast majority of applications are going ahead as normal.
Depending on your level of cover required, and your health, you may need a medical.
As you can imagine amid lockdown these were halted but they are operating once again. Most are carried out at your home or work and are brief. Many just need a summary of GPs notes to give the underwriter sufficient information to make a decision.
What happens if I have a health complication like a chronic condition or injury?
A provider can take 3 routes if they think something in your medical history means you are, in the opinion of their underwriters, more likely to claim than the average person.
- Decline to offer you cover
- ‘Load’ the premium, i.e. charge you more for the cover
- ‘Exclude’, meaning they will exclude a certain condition or part of your body due to your previous medical history.
Some conditions make getting cover harder, and occasionally impossible. This is quite rare. We have many years of experience with these sorts of issues. If you have a condition that you fear will prevent you gaining cover, speak to us.
My income has dropped during COVID, so why should I spend money on protection now?
Some medics and dentists have felt a loss of income during COVID. I’m finding that this situation is a catalyst for many new applications.
Before, the theory of living on less was unwanted, but maybe easier to deal with in theory rather than practice. Having lived through a period of reduced income it sharpens the focus and makes many realise this is not something they would want to cope with along side poor health – potentially until retirement.
A policy that protects your income costs a relatively small % of your income. Also, you don’t have to take the maximum allowable (often 70% of your pre-illness earnings). You can take a policy you find affordable now, and when your income increases you can increase your level of cover (if you want to).
What are the advantages of income protection over drawing your NHS pension early? What penalties might a GP face from drawing early?
Each version of the NHS Pension scheme has its own normal retirement age (NRA) and so the penalty varies with that. The NRA for the 2015 scheme is 67, for the 2008 scheme it is 65, and for the 1995 scheme, it is 60.
If you take your NHS Pension scheme early you will be penalised. This penalty is different depending on which scheme you are in. Many members will have benefits in more than one scheme. It’s not straightforward! Also, the earliest you are allowed to take early retirement benefits is 55.
What if you need an income as you are ill before this?
If you are too ill to work you may have ill-health retirement (IHR) from the NHS, but that has a tiered system that dictates the final figures you would receive and is not easy to achieve.
What key questions are asked when applying for income protection?
Simple questions about your height, weight, lifestyle, sports played plus own and family medical history.
I truly believe protection is the most vital element of any financial plan. I have felt this way my whole career. Yes, it’s more exciting to discuss and plan for the big forever house or retirement and the adventures these hold, but we all need continuing income to fuel these hopes and dreams.
Incurring a short term, or career ending illness, or any sort of injury is worrying enough. So having a stand alone, purpose built income protection policy in place is probably one of the best plans you’ll ever make – it takes the worry out of money when you need to focus on recovery.
So, if you have previously dismissed income protection, or any protection policy as a waste of time and money, or felt that although you would like to benefit from such a policy you don’t believe you could get any cover, think again and seek specialist advice.
If you hold an income protection policy but haven’t reviewed it in the last year or since something changed with your income, work or family, do it now!
We would always advise you to seek specialist financial advice to ensure cover is appropriate to your needs.
Now, are you ready to take out an income protection policy? Let us know by adding a comment below.