Do I Need Short-Term Income Protection?
Unusually for the financial world, Short-Term Income Protection (STIP) is actually a descriptive product name. This policy provides you with a tax-free income to cover your outgoings in the event of accident, sickness, or unemployment – this is why it’s sometimes referred to as ASU insurance. You’ll receive an agreed monthly amount over a short period, usually 12 months.1
In this post, I’ll explain how it works and outline the main features to help you decide whether it’s right for you.
How does Short-Term Income Protection work?
STIP is an insurance policy that covers specific events, illnesses, and injuries. You choose whether you want cover for:
- Accident, Sickness, and Unemployment
- Accident & Sickness only
- Unemployment only
The term unemployment is misleading, as it covers only redundancy. And only if you had no idea that redundancy was likely when you took out the policy.2 This is also the most expensive element of STIP, so you can reduce the premiums by excluding it. In any case, it’s notoriously difficult to claim for redundancy, and hopefully you’d receive some form of payout from your employer. Check the Government website to calculate your likely redundancy payment.
Some illnesses and most pre-existing conditions are excluded. You’re also unable to claim if an injury or illness is self-inflicted (including drug and alcohol abuse). Not all insurers cover mental health problems, so check any prospective policy carefully. You can download a useful guide from MIND on how to choose the right cover for more information.
What does it cost?
As with all insurance, the cost depends on your age, lifestyle, and amount of cover. You can also reduce the premiums by extending the deferral period. This is the time before which you start receiving the payments. So, if you waited 60 days, your premium will be lower. The default is commonly 30 days, but you can pay extra for the policy to kick in immediately.
You can usually cover up to 65% of your gross monthly salary.
Here’s a typical illustration of monthly premiums, based on a healthy 45-year-old earning the UK average salary of £2,300 per month. The maximum cover in this scenario is £1,495 (65% of £2,300).
|Type of cover||Deferral period|
|0 days||30 days||60 days|
|Accident, Sickness & Unemployment||£52||£42.00||£36.00|
|Accident & Sickness||£26||£18.00||£17.00|
As you can see, the unemployment (redundancy) element really pushes up the premium.
Following the deferral period, you’d receive £1,495 a month for 12 months.
Is Short-Term Income Protection worthwhile?
As ever, it depends on your circumstances. Before considering STIP, check the following:
- Do you already have sick pay from your employer? (Some organisations, especially in the public sector, will give you six months’ full pay, followed by six month’s half-pay if you’re unable to work. Statutory Sick Pay, available to most employees, is currently £94.25 a week. Self-employed workers could be eligible for Employment and Support Allowance.)
- Are your savings enough to keep you going for a year?
- Could your partner or family support you temporarily?
In summary, this type of protection is short-term, usually capped at 65% of your salary, and only pays out in specific circumstances. If possible, it’s better to build up an emergency fund and/or reduce your outgoings to ensure you can keep afloat when the unexpected happens.
An alternative to STIP is Income Protection Insurance, which I’ll introduce in my next post. Although more expensive, this policy continues to provide you with an income until you’re able to return to work. STIP might save you some cash, but potentially you’d be left with no money when the payments cease.
If you decide to go ahead, read the small print on any policy you’re considering. As this is a complex area, you could end up paying for a policy that’s not fit for purpose. Advisory brokers, although slightly more expensive than going direct to an insurer, offer expert advice on some of the complexities. Visit MoneySavingExpert for recommendations or the Money Advice Service for additional guidance. You could also consult an Independent Financial Advisor if you’re looking at insurance during a wider review of your money situation.
Everyone’s needs are different, so please do spend some time deciding what’s right for you.
This post is for information only and does not constitute financial advice.
Image © Andy Dean – stock.adobe.com