Understanding income protection

Income protection insurance can give you a regular income, free of UK income tax, if you lose income because you can’t work as you are ill or injured. The main types of contract tend to replace a proportion of your lost income. We have put together this section to help you understand income protection better.

For more details please see the insurance company’s key features document.

How does income protection work?

Income protection insurance pays you a regular income, often until your retirement age, if you cannot work because you are ill or injured, in return for you paying a regular premium.

How do I decide if I need income protection?

No one wants to think about the possibility of falling ill or having an accident but, on top of the unexpected, it's worth remembering that dentistry is a physically and mentally demanding profession. Therefore, it's no surprise that many dentists suffer some form of illness or injury during their careers.

Every year we help over a thousand dentists support their lifestyles, by providing them with an income when they can’t work because they are ill or injured. Some of these members, including a few just in their 30s, will never be able to practise dentistry again, so they will receive this financial support until they retire.

Could you still maintain your lifestyle without your current income? You may have specific insurances to cover your practice costs, the mortgage on your home, as well as personal loans, but not necessarily to help you maintain your standard of living.

So the question should be ‘can I still maintain my lifestyle without protecting my income?’ not ‘why do I need income protection?’

What other sources of income might I have?

When you are deciding what income protection cover you may need, it could be worth reviewing any other sources of income that you may have, if you were off work. These can include:

  • Spouse/partner’s income: If this is the case then it’s important to think about their provisions for sickness cover as well
  • Alternative employment: You could consider taking on an alternative role if you couldn’t work as a dentist but this may not always be possible
  • Savings and investments: If you have enough savings you may be able to rely on them but think about whether would you be able to access them when you need to
  • A reduction in monthly outgoings: You could do this by lowering your standard of living and releasing funds by downsizing
  • Pensions: You may be able to take early retirement, but you may receive a reduced settlement as a consequence

If you feel you can cover your outgoing expenses with any of these; or perhaps your employer covers you not only for the short term, but the long term as well; or you feel you can live on state benefits, then you may decide that you don’t need income protection insurance.

Employed or self-employed

If you work in a dental school, hospital, the armed forces or a company, you will often have NHS cover or cover from your employer, so it is important to know what your sick pay entitlement is. This could cover you in the short term, but what would you need if you were off for longer?

As an NHS employee, you could receive your full salary for up to six months and half your salary for the next six months. Beyond that you could find yourself reliant on state benefits, if you have no other sources of income.

If you work in a practice, you are usually self-employed. This means that you would, most likely, experience an immediate loss of income if you couldn’t see your patients. You therefore might wish to cover this loss from the very first day you are off sick.

Current standard NHS contracts have a variety of qualification criteria and don’t start paying benefits until you have been off for four weeks with an illness or injury, up to a maximum of 22 weeks in any 52 week period. Would this be enough for you?

State benefits

If you are an employee, and don’t have a company scheme with your employer, you may only be entitled to Statutory Sick Pay, which is currently £89.35 per week for the first 28 weeks if you have been sick for more than four days in a row.

If you are self-employed or after your entitlement to statutory sick pay has stopped, you may be entitled to claim the Employment and Support Allowance, which is currently up to £73.10 per week (up to £57.90 if you are under 25) for the first 13 weeks after your claim. After that, depending on a Work Capability Assessment, you may be entitled to up to £109.65 per week.

For more information on Statutory Sick Pay click here or ESA click here.

If I decide I want income protection insurance, what choices do I need to make?

Take the time to consider what options you need, remember they are likely to affect the premiums you have to pay, so read the insurer’s key features documents carefully.

  1. How long do I want to wait before my benefits are paid? This is called the deferred period and you can choose to be paid from the first full day you are off sick, or even wait for a year or two. Some companies have a minimum deferred period of 13 or 26 weeks which you may think is too long, if you are self-employed. It is important you think about being covered not just for the short term, but also for your long term security. Choosing a shorter deferred period will generally increase the cost of your cover.
  2. Do I want guaranteed, renewable or reviewable premiums? If you choose guaranteed premiums, the amount you pay is fixed in advance. These tend to be more expensive than other rates and cannot be changed by the insurer. Renewable premiums are only set for a fixed period, whereas reviewable rates allow the insurer to change everyone’s premiums at the same rate, based on the organisation’s claims experience.
  3. What definition of ‘incapacity’ is best for me? Incapacity is how insurers define your illness or injury and they tend to define them in relation to:
    Any occupation: You can only claim benefits if you cannot work doing any job at all.
    Any suited occupation: You only get paid if you can’t do your own occupation or any occupation you are suited to, as defined in your policy.
    Activities of daily living: You can only claim benefits if you cannot carry out everyday tasks, such as washing or dressing yourself without the assistance of another person.
    Activities of daily working: You can only claim benefits if you cannot carry out a selection of everyday work tasks, such as talking.
    Own occupation: You can claim benefits for any illness or injury if you cannot do your current job.
    Don’t forget to check whether your insurer limits the time ‘incapacity’ is defined on an ‘own occupation’ basis during the claim.
  4. Do I want my benefit payments to reduce, remain level, or increase over time? You can chose benefits that reduce over the time of a claim; remain level over the period of your claim, so they stay the same over the long term; or have benefits that increase in line with inflation, so better retain their true value over the long term.
What type of income protection is right for me?

Many insurers provide income protection cover alongside other products you may buy from them. Some may have standard contracts with little flexibility for your profession, and others may not offer any cash when you leave them, whether you have claimed or not. So it is always important to check the details of any policy. The key features document will allow you to compare the various products in the market.

Many commercial insurers are owned by shareholders and not the policyholders. Mutual organisations are different as they do not have external stakeholders, and are run for the benefit of their members. A few Friendly Societies (including Dentists‘ Provident) have a unique contract called the ‘Holloway Contract’ (there are only nine in existence), that combine income protection with a fund for retirement.

What other health protection products are there?

The health insurance industry can give you the ‘peace of mind’ that you and your family are supported if you suffer an illness or injury. Their products include:

  • Critical illness which pays you a lump sum only if you contract one of the specific illnesses listed in your policy
  • Private medical insurance which covers the cost of private medical treatment for ‘acute conditions’
  • Long term care insurance that will finance long term care, if you are unable to care for yourself
  • Accident, sickness and unemployment cover that usually provides benefits for a limited period, such as a mortgage payment protection, which may cover your mortgage for a year or two, if you are off sick or made redundant
  • Practice expenses/overhead insurances (including locum cover) provide reimbursement for the expenses of operating your practice, if you cannot work. It may include rent, utilities and other fixed costs

All references to taxation are within the context of UK tax regulations. HM Revenue & Customs rules, regarding tax treatment of premiums and benefits in relation to Holloway contracts and income protection, may change in the future. Members outside of the UK should seek professional tax advice. State benefits quoted represents our understanding of the current state benefit rules and allowances in the UK.

These pages are intended for general information only. They are not designed to provide financial or other advice, nor are they intended to make recommendations regarding the suitability of our plans for a particular individual. Nothing on these pages constitutes an invitation, inducement or offer to subscribe for membership or additional benefits of Dentists’ Provident. You can find full details of our plans in our memorandum and rules. Applications are required and non-standard terms may apply.

Documents

For further information, please read the key features of our dentists’ income protection plan and our rules.

 

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