Short Term Income Protection: All You Need To Know

If you were unable to work due to illness or an injury sustained in an accident, could you afford to pay the mortgage, utility bills and monthly shopping expenses? 

Short-term income protection, or STIP, is an insurance policy that provides you with financial protection if you are unable to work following an illness or injury caused by an accident. 

You may also see them called accident and sickness protection insurance policies. 

Taking out short-term income protection provides you with the reassurance that your mortgage, bills and other family expenses will be covered if you lose your salary due to unfortunate circumstances. 

Some STIP policies also cover unemployment caused by redundancy. However, redundancies caused by the coronavirus pandemic are not usually covered.

However, if your circumstances warrant it, short-term income protection could be the best option available to help with living expenses if you are unable to work.

STIP policies are the most cost-effective insurance that covers your living expenses should you lose your income. For that reason, some people consider STIP is the best type of income protection policy.

How Does Short-Term Income Protection Work? 

When you take out a short-term income protection policy, you pay a monthly ‘premium’. According to moneyadviceservice.org, monthly payments for accident and sickness insurance can be anything from 41p a month to £17 a month.

STIP policies are activated if you are unable to work due to long-term illness, or you’re in an accident and suffer debilitating injuries that prevent you from going to work. 

If you do need to activate your STIP policy you will receive a percentage of your usual salary. Most accident and sickness insurance policies pay between 50-60% of your salary. 

Short-term income protection policies from Bettersafe pay 65% of your existing salary or £2000 a month whichever is less. Payments are tax-free but you may want to continue paying your national insurance contributions so that you receive a full pension when you retire. 

Payouts - known as “benefits” - will only be paid for the period specified in the policy. The standard term is 24 months, but short-term income insurance can be anything from 12-60 months. You have the option to choose how long you want benefits to be paid.

Most policies also carry a ‘deferred period’ before you can make a claim. The deferred period is usually 6-12 months depending on whether you receive sick pay through your employer.

What Does Deferred Period Mean?

Short-term income protection stipulates a waiting period which is referred to as a ‘deferred period’. This means that a certain amount of time has to pass before you are entitled to receive benefits once you become unable to work. 

Deferred periods can be as little as one month and up to 52 weeks. The length of the deferred period depends on your personal circumstances. 

For example, if you receive 12-months of statutory sick pay from your place of employment, you can opt for a deferred period of 52 weeks. If you are self-employed, you may want the policy to pay out after one month. 

Longer deferred periods carry lower monthly premiums. Some self-employed individuals, therefore, might prefer to rely on their savings for several months and pay lower monthly payments into their short-term income protection policy.

What Type Of Illnesses And Injuries Do STIPs Cover? 

Accident and illness insurance covers a wide range of mental and physical illnesses. However, the condition has to be classified as causing incapacity to work and supported by evidence from a medical practitioner or mental health professional.  

Typical illnesses include stress, anxiety and depression, cardiovascular issues, strokes, cancer, loss of a limb, multiple sclerosis or Parkinson’s disease.

It should be noted that some policies do not cover every type of illness so check with the insurance company before taking out STIP.

What Does STIP Not Cover? 

Before you are entitled to receive benefits from a sickness and illness protection policy, you must meet the qualifying criteria on medical grounds. A doctors report will be required.

• Short-term income protection policies do not cover the following: 
• Self-inflicted injuries
• Illnesses you were aware of before taking out the insurance policy
• Illnesses or accidents that are the result of drug or alcohol abuse
• Early retirement, voluntary redundancy or seasonal unemployment
• Loss of employment due to coronavirus
• If you were aware of redundancy prior to taking out the policy
• During the agreed deferred period

What Other Types Of Insurance Are Available?

There are several other types of income protection insurance available that cover living costs should you not be able to work. It’s important to know what your options are and the differences between them.

Income Protection Insurance 

Income protection insurance covers you for sickness or incapacity caused by accident and illness. Benefits are available until you are able to return to work. 

Like STIP, long-term income protection pays a percentage of the salary you are earning at the time of sickness or injury. Payments are made monthly.

The key difference is that STIP only pays benefits for the length of the policy, whereas income protection insurance continues to pay benefits until you are able to return to work or you retire and start drawing your pension. 

Due to the potential for a longer payout period, standard income protection is much more expensive than short term income protection.

It should also be noted that income protection doesn’t usually cover you for redundancy whereas short-term income protection does if you choose to take that option.

Critical Illness Insurance

This is a long-term policy that is usually taken out as additional cover for standard health insurance. The policies cover you for medical expenses caused by illnesses that require extensive medical care and treatment. 

Whereas short-term income protection pays monthly benefits to cover the cost of living expenses, critical illness insurance pays a lump sum which is typically used to pay for medical care and treatment.

How Long Are Benefits Paid Out With STIP Insurance? 

The typical term for STIP policies is for 24-months. However, you can reduce the payout period to 12 months or extend it to as much as five years. The time period you choose will determine the amount of the monthly premium you pay.

How Much Do Short-Term Income Protection Policies Cost?

Premium payments vary from one insurance company to the next. Policies are also determined by various factors including: 

• Your age
• How long the policy will pay benefits for
• The length of the deferred period
• What the policy covers; accident and sickness only, redundancy only or both
• The type of job you do - specialist jobs and manual labour skills tend to carry higher premiums
• Your current health including medical history and hereditary conditions in your family 
• Weight and other factors including whether you smoke and how much you drink
• The level of cover you want to take out; own occupation, suited occupation or any occupation 
• Whether you choose guaranteed premiums or reviewable premiums

What’s The Difference Between Guaranteed Premium & Reviewable Premiums? 

Some insurers give you the option between guaranteed premium and reviewable rates. We recommend looking for policies that offer guaranteed premiums. 

With a guaranteed premium, the monthly payments are fixed. This means your monthly payments always stay the same and you know how much to budget for each month. 

Reviewable premiums are less assured. They may appear to be the more attractive option at the time you take out your STIP, but they may end up costing you more if the payments increase year on year.

Can You Activate A STIP If You Are Unemployed When You Have An Accident Or Illness?

There is a possibility that you will still be entitled to benefits if you are not working when you activate your short-term protection policy. However, certain criteria will need to be met. 

Because income protection only covers part of your income, the number of benefits you are entitled to receive will be determined by the amount of time you have been unemployed, the reasons you are unable to work and the type of occupation your policy covers. 

The type of cover available with a STIP include:

Specialist Occupation: For example an oil rig worker, deep-sea diver, archaeologist.

Suited Occupation: These are other jobs that you have the qualifications and experience for but cannot find work due to illness or accident. However, let’s say you were a construction worker, but lose the use of your legs due to an accident. You wouldn’t be able to work as a construction worker or other manual labour jobs but you may have the qualifications to provide consultancy to construction companies thus remain in your specialist industry. 

Any Occupation: This type of cover would mean you are entitled to benefits because you are too ill or incapacitated to perform any type of work.

When Do Payments For Short Term Income Protection Come To An End?

In most cases, the benefits you receive from your STIP will end once you recover and return to work or once the time period specified in the policy expires.

Payments will also cease if you enter into retirement or if you pass away before the payment period expires.

Can You Make More Than One Claim On The Same STIP Policy? 

It may be possible to claim multiple times on the same STIP insurance policy. If you have an accident, for example, and receive benefits from your STIP for six months before returning to work, but then contract an illness that keeps you out of work for a year at a later date, you will be entitled to receive benefits for two different instances.

Will I Receive Benefits From My Policy If I Lose My Job Because Of Covid-19? 

Whilst STIP policies do cover general redundancies, insurance companies do not pay out to policyholders that lose their job if the company you work for goes out of business due to COVID. 

However, if you were to contract coronavirus and are unable to work due to your illness, the STIP policies we offer at Bettersafe would cover you for loss of earning once the deferred period kicks in.

Who Is Short-Term Income Protection Ideal For? 

STIP is not the best option for everybody but it’s arguably the best type of income protection insurance for individuals that fall into the following categories. 

• Self-employed freelancers and business owners
• Employees that do not receive sick pay, redundancy or employee benefits from your employer
• You do not have sufficient savings to fall back on
• Young people that have a young family to support
• You have a mortgage and do not pay a mortgage protection premium

Is There An Age Limit On Short-Term Income Policies? 

Insurance companies have an age limit that determines whether you are entitled to pay into a short term protection policy. The age differs from one insurer to the next but usually falls between 54 and 64.

Why Buy Income Protection With Bettersafe? 

The income protection policy we offer at Bettersafe is designed to protect 65% of your income or up to £2000, whichever is the lower. The rates we offer are very competitive and also push the boundaries a little further than most insurers are prepared to go. 

Our STIPs also include protection even if you are able to return to work part-time. Providing you are not working more than 75% of the hours you would ordinarily work if you were fully fit, you would still be entitled to receive benefits. 

You will find more information about the income protection policies we offer at Bettersafe here. Alternatively, give one of our friendly advisors a call and we will answer any question you have.