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The importance of ensuring that you continue to draw an income commensurate with expenditure throughout your working life cannot be overemphasised. Such a balancing of the books has become even more vital with the average income of a principal exceeding £100,000 per annum and that of a salaried GP being about £70,000.
Lifestyles tend to reflect income and both can be severely compromised through ill-health preventing work. A whole industry has been built around the need to protect an income and in general this comes under the umbrella of 'income protection insurance'.
Income protection insurance is an insurance policy designed to provide a regular tax-free benefit if, through illness or injury, you are unable to work and earn an income.
How does income protection insurance work?
Under an income protection policy, you pay regular premiums to an insurance company and, in return, they agree that subject to certain conditions they will pay you a benefit if you are unable to work through
Definitions of incapacity vary but for the purposes of general practice, the applicant should only seek policies that cover 'own occupation', ie where the incapacity is sufficient to prevent the doctor from performing his/her duties as a GP.
In any policy there will be a 'deferred period', a time of absence from work through illness, after which the policy will begin to pay out.
This can be any time, although it is sensible to choose a time after which your income is no longer covered by existing arrangements.
PCTs will cover principals for a set period off work and, depending on list size, may also include a financial uplift to cover the practice for locum costs.
Salaried GPs, whether employed by a practice or the PCT, should have contracts that include cover for sickness at full pay for a certain number of months, often three, and half pay for a further period, again usually three months.
The length of deferred period, rather like the level of voluntary excess on a car insurance policy, can significantly impact on premiums.
A policy will continue to pay a monthly
income until the recipient would nor-
mally retire. This varies between 60 or
65 years depending on the insurance
Level of cover
Remember that the income you receive from such insurance is tax-free. As a rule, such insurance will cover you for no
more than 60 per cent of your average income over the preceding three years' accounts if you are self-employed, ie a principal, or your last year's taxed income if you are salaried. The rational for this policy is twofold:
·To provide a pecuniary incentive to return to work wherever possible;
·Once income tax relief is factored in, the actual amount is closer to 80 per cent of pre-existing income.
Any insurer will limit the amount they will pay you in accordance with income from any other scheme (including state benefits) that you might receive.
Thus any policy payout will be offset by income received from an employer or PCT. It is wasteful, foolishly extravagant and pointless being over insured.
There is no limit to the number of
claims that you can make over a working lifetime.
Working out the cost
Most insurance companies will offer a
range of policies. The overall cost of
a policy is likely to be an important consideration.
You should remember that, in general terms, the broader the scope of the cover, the greater the cost.
For example, 'own occupation' cover is likely to be more expensive than 'any occupation' cover. The exact cost will depend on your age, sex, occupation and medical history. As a rule, it is worth taking out a policy once you have commenced stable employment.
Additional factors affecting the cost of premiums include:
·The level of income required
·The length of the deferred period
·The length of cover required
·Whether the premium you pay is fixed or variable.
Policies can include
·Guaranteed rates, which remain constant over the length of the policy in return for a fixed agreed income.
·Reviewable rates where the insurer can change the amount it charges you in the light of its costs, overall claims experience, etc.
This rate does not depend on any claims you have made. Usually, your insurer can make no change during the early period of your policy.
·Renewable rates where premiums are
set for a fixed period. At the end of
that time, you have the right to continue your plan, and your insurance company will set the premium level for a further fixed period, based on your age at that
Beware rising costs
The type of rate you choose will affect the amount you pay. Initially, guaranteed rates are likely to be the most expensive. But over a period of years, renewable rates may become more expensive since they increase as you grow older.
In addition you can choose whether to increase the level of your benefit over time in line with inflation, although again this will increase the premiums you pay over the years of the policy.
The cost of premiums vary depending on cover but work out at around £1,000 to £2,000 per annum. Unfortunately premiums are not tax deductible as a business expense.
Income protection insurance is a necessity rather than a luxury. There are a large number of schemes on offer.
When evaluating suppliers, a useful tip is to create a tabular comparison encom-
passing headings such as annual income
required, deferred period, reviews, retirement age, etc, in order to compare like with like.
Such a system would also be useful when weighing up advice provided by an independent financial adviser.