Income Protection vs Payment Protection Insurance

On February 25, 2011, in Uncategorized, by Kesh Thukaram

What is the difference between income protection and payment protection insurance?

I have not come across a simple, clear, well defined explanation of these two most commonly used terms in the protection industry. Though I have read reams of policy wordings, key fact documents of Best Insurance and our competitors, its baffling that the difference is not well explained. I have all sympathies for my insurance colleagues who due to nature of their work, the difference would seem very obvious and I remember some of them looked baffled when I asked this and the expression on their faces was all about – how come this person does not even understand such a fundamental difference. However when I asked around my friends and people I know who are not in the industry almost mis-took one for the other. A section of them thought whats all this fuss all about and the ones who cared to reflect on my question, thought it was not trivial – afterall both are insurance policies which pay out when one loses job or has an accident or sickness leading to loss of pay.

So what is the answer really?

Both Income and payment protection protect – accident, sickness and unemployment (ASU) and both pay out for 12 months or 18 months depending on the benefit period chosen. The fundamental and most important difference is the basis on which the policy is issued. In terms of payment protection – the monthly benefit amount is always based on the re-payment instalment of mortgage, rent or a secured loan but income protection does not have any of those requirements. Income protection is based on your income rather than the payments you are due to make every month. When a claim has to be paid out, the payment protection insurer will seek proof of mortgage, rent or loan payments payments due to be made by you and an income protection insurer would like to see proof of your income. From an insurer’s perspective, in a typical underwriting language – it all comes down to “insurable interest”. I will not bore you on that.

So it is really simple. If you want to get your accident, sickness and unemployment insurance on the basis of your monthly outgoings – then go for payment protection if not it is income protection for you.

Hope the above few words helps in understanding these often used (wrongly used) terminologies.

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