Income Protection - Deferred Period
When you take out income protection, you can choose to have a 'deferred period'.
You can also choose the length of the deferred period.
The deferred period is a period of time, in the event of a claim, during which there is no entitlement to any benefits from your income protection policy.
(During the deferred period, you have to continue to pay the premiums of the income protection plan. However, when the income payments to you start, you will no longer have to pay the premiums.)
There are two main benefits in being able to choose a deferred period:
The first benefit is clear-cut:
If you work for an employer which provides (for example) sick pay of full pay for 6 months, then nothing, you would choose a deferred period of 6 months for your income protection plan.
In this case, immediately your sick pay ceased, payment to you from your income protection plan would commence.
Therefore, the benefit to you is that you have an uninterrupted income if you are off sick long-term.
The second benefit is perhaps not so clear but is very valuable:
The cost of income protection cover takes into account your occupational risk (the risk would not be the same for an office worker as for a steeple jack), your height and weight, smoking status, age, sex, health and to what age you would like to be covered.
It also depends on the chosen deferred period. It is normally the case that the longer the deferred period, the cheaper is your income protection cover.
Let's imagine that you are either self-employed, with no 'employer sick pay' benefits, or you work for an employer who does not provide any sick pay benefits, other than Statutory Sick Pay.DirectGov.
You may therefore think that you should have an income protection cover with either no deferred period, or perhaps cover with just a one month deferred period.
Unfortunately, the cost of a plan with either no or an extremely short deferred period can be very high, perhaps making the cover unaffordable.
However, if you have a small amount of savings, you could choose to 'self-insure' yourself for a short period and therefore select income protection cover with a longer deferred period, say 3 months.
For example, say you needed £1,500 a month and if you had savings of £4,500 you could live on your savings for 3 months until your £1,500 a month income protection payments began.
This strategy can sometimes even halve the cost of income protection.
The money that you're saving on the cost of income protection can be used to increase your savings!
Apart from the longer deferred period, the cover is identical. Once your payments start, you will get exactly the same monthly payments and to the same retirement age.
The benefit to you is that the cost of your income protection cover is much lower.
