There are many possible attractions to working as a locum GP, rather than in a salaried role or as a partner in a practice. One major disadvantage, however, is the lack of paid sick leave, or the ability to continue claiming drawings if illness prevents you from working. Any period of extended absence, even just a month, could severely impact your income, making you reliant on savings or having to make lifestyle changes to reduce outgoings. This can be easily avoided, however, with a simple and cost effective Personal Income Replacement insurance, which will effectively provide a substitute for sick pay.
When discussing their financial security, many people are aware of Income Protection insurance, indeed most will either have it in place already or be actively seeking cover. However, whilst Income Protection is certainly vital to long term financial planning, Income Replacement cover is arguably of equal importance and is a policy about which many are unaware.
What is Personal Income Replacement?
Typically it is an annual policy, designed to protect your income in the event that you are unable to work due to illness or injury for periods of up to 12 months. Benefits generally start after a period of 2, 4 or 8 weeks, depending on your requirements and will be paid for up to 12 months from the first date of incapacity. Additional benefits are often included for absences such as family emergencies, compassionate leave, maternity and paternity leave, jury service and suspension.
What is the difference between Income Protection and Personal Income Replacement?
There are variants in the terms of cover, but essentially the main difference is how soon and for how long you are able to claim. Personal Income Replacement is intended to cover short to medium term illness/injury, with benefits starting soon after your first date of absence, whereas Income Protection is for long term security, with payments typically starting after 6 or 12 months and continuing up to retirement (some policies do have upper age limits).
Why take Personal Income Replacement as well as Income Protection?
In many people’s minds, short term illnesses are not as concerning as a long term illness, understandably so – financial implications aside, an ailment that prevents someone from working for a year or more is likely to be severely debilitating. When viewing this from a financial and risk perspective however, absences lasting for periods of a few months are more probable than those lasting for 12 months or longer. Whilst long term incapacity has the potential for greater financial loss and certainly needs to be insured against, these shorter term absences can also have a severe impact on income and consequently savings, lifestyle and long term financial goals.
Do I need Personal Income Replacement?
This naturally comes down to your personal circumstances. Outgoings are equally as relevant as income, with financial commitments such as mortgages, school fees and utilities, potentially having a significant impact on your need for cover. Savings and long term financial goals also need to be considered. When assessing your own requirements, it is worth thinking about the following:
- Is there another source of income in your household? Will it be sufficient to cover all financial commitments in the event that your own income is interrupted? How long could you comfortably rely on this for?
- Do you have savings you can use to supplement household income? How long would these last?
- If you do have savings, are they intended for any long term financial goals, such as school fees, travel or retirement? What impact would it have on these plans if you were to have to use your savings to cover ill health?
- Having considered all of the above, what would be your financial situation if you were to be unable to work for a month? Three months? Six months?
If the answer to this final question is that you would be struggling to meet all financial commitments or perhaps that you could cover outgoings, but your lifestyle and long term financial plans would be adversely affected, it would be sensible to consider an Personal Income Replacement policy.
The cost of Personal Income Replacement cover
Premiums can be surprisingly affordable, especially if your cover is tailored to your specific circumstances. For example, you don’t have to insure for the absolute maximum benefit available if you don’t need to, just insure for a sufficient proportion of your income to live comfortably whilst incapacitated – it is worth noting that under current legislation the benefit payable will not be subject to income tax. The length of the excess period can also have quite a bearing on cost, so if you can manage without an income for as long as two months or more, you can opt for a longer deferred period in return for a reduced premium. You may also find that by taking Personal Income Replacement cover, you can
increase the length of the deferred period on a long term Income Protection policy to 12 months, reducing the premium on what is normally a more expensive policy.
With any form of Personal Income Replacement or Income Protection, it is important to understand how the policy will interact with any similar insurance you may hold and to ensure that the cover provided is suited to your individual circumstances. For this reason, it is prudent to seek the advice of a suitable professional who can help you understand your need for cover and how best to achieve the appropriate level of protection.
Article written by Miles Brown Cert CII
Medical Money Management (General Insurance Brokers) Ltd