Income protection insurance is not intended to protect all of your income. Any insurer will be concerned about the motivation to return to work if a customer is earning as much (or more) than they were when they were working.
Most policies will therefore allow you to insure a percentage of your income. Depending on the insurer this tends to be between 50% - 65%. While this may give you some concern that you will not be able to pay all your bills in the event of a claim, it is worth pointing out that the majority of personal income protection insurance policies will pay out Tax Free. Therefore the gap in the amount paid out by the policy and the amount paid to you by your employer, after tax and deductions, isn't as big a gap as it may first appear.
It is important to choose a deferment period that is closest to the point when your income will actual stop. All insurers will check any income you receive from their policy, your employer and any other income protection policies. If the sum of this income is greater than the policy maximum (50% - 65% of your gross income) then the insurer will reduce the benefit they pay you, to ensure that the income you receive from your employer and/or all insurance policies is no more than the policy maximum.
As soon as the income from your employer stops and/or you stop receiving benefit from other policies, then the insurer will pay you the full benefit.
To avoid problems of this nature there are two key points to remember.
1. Make sure your selected deferment period is as close as possible to the period your employer will continue to pay you.
2. If you have more than one income protection policy you must make sure that the benefit you receive from all your income protection policies does not exceed the lowest policy maximum.
To explain point 2 above further, imagine you had three income protection policies, one that covered a maximum of 50% of gross earnings, another covering 60% and the third 65%. Then the combined benefit you could receive from all of the income protection policies should not exceed 50% of your gross earnings.
If the benefit does exceed the lowest maximum percentage, then one or more income protection insurer will reduce the amount of benefit they pay you.
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