One of the least understood types of insurance is income protection insurance, or IPI. This type of insurance does not cover unemployment, as is commonly believed. Rather, it protects a workers income in the event said worker becomes temporarily or permanently incapacitated. IPI used to be known as Permanent Health Insurance, or PHI. The term Income Protection Insurance is generally used only in the UK and Ireland; in the States such insurance is known as disability insurance.
IPI policies only pay if the worker becomes disabled because of an accident or an illness. Like most insurance policies, IPI policies contain a certain number of restrictions. For instance, they generally will not pay if the injury or illness is caused by intentional self-harm or is a result of drug abuse.
Benefits are limited to a certain percentage of the policyholders income, usually about 70%. This limit is enacted in order to give the policyholder an incentive to go back to work as soon as possible. Benefits are paid on either a monthly, weekly or bimonthly basis. Payments cease as soon as the policyholder recovers, dies or enters retirement.
There is also a deferral period between the onset of disability and the beginning of benefits. It varies by policy and can be anywhere from one month to a full year. The length of the deferral period has a significant effect on the price of the policy.
A number of types of IPI policies are available. Fixed policies do not change in value over the lifetime of the policy. Increasing IPI policies adjust for inflation. Renewable policies must be renewed every few years just like a term life insurance policy. Group IPI policies are provided by an employer. The latter policies are the only ones that expire; if an employee leaves service with the employer the policy is cancelled. Otherwise, once a policy is issued the insurer can not cancel it. That is provided the policyholder pays the premiums, of course.
An IPI policy tends to be slightly more expensive than most other commonly bought forms of insurance, but the extra expense is negligible compared to the protection received.