The length of your deferred period will effect several aspects of your policy and will have a significant impact on the monthly premium you pay – so it’s important that you are well informed from the outset.
Below we have explained everything you need to know about the deferred period in relation to income protection insurance.
What is a deferred period?
Income protection insurance is a policy designed to help you out financially if you are unable to work due to an injury or illness. It pays out a set amount of money each month so you still have an income if you are unable to continue working and earning.
The ‘deferred period’ is a fixed period of time that has to pass before your monthly pay outs begin. During this time you might rely on your savings or company sick pay to pay the bills before needing the benefit of your income protection policy.
The deferred period is therefore similar to the ‘policy excess’ feature of a car insurance policy. The excess is the amount you have to pay first towards a claim, with higher excess commitments being rewarded with lower premiums. With income protection insurance, the longer you go without requiring the policy to start paying out, the lower your monthly premiums will be.
Typical deferred period lengths
Many insurance companies offer a range of deferred periods for policyholders to choose from, with some of the most common being:
- Back to Day One Cover
- 1 week
- 2 weeks
- 4 weeks
- 8 weeks
- 13 weeks
- 6 months
- 12 months
The minimum amount of time you can wait for income protection insurance to start paying out is known as ‘back-to-day-one’ cover. This type of policy will start paying out after you have been out of work for three days and is backdated to the first day you were unable to work.
The maximum deferred period is usually 12 months, although some insurers may offer a two-year deferment period.
How long should my deferred period be?
The length of deferred period that is best for you will depend on your own individual circumstances. It can of course be tempting to choose a longer deferred period in order to benefit from the reduced premiums. However, you need to consider how much you have in savings and how long you will receive sick pay to make sure you can continue to pay your bills and support your household while you are not working.
If your employer pays you full sick pay for a set period of time, then you should set your deferred period so that you start receiving pay outs from your policy when the sick pay from your employer stops. This is because the insurance company will not pay out if you are still receiving any form of income from your employer.
Similarly, if you have access to personal savings then you should factor this in to your decision in order to save money on the monthly premiums. For example, if your employer pays you full sick pay for three months and you have savings that can last you for three months, then you should set your deferred period to six months.
Deferred periods for self-employed workers and freelancers
One of the main reasons that people take out income protection insurance is the lack of adequate sick pay. If you are self-employed or a freelancer you will not receive any form of sick pay other than Statutory Sick Pay, which may not be enough to cover your expenses. It is therefore likely that you will have to rely on your savings to cover household bills and expenses if you are unable to work.
For more information read our guide: Do self-employed workers need income protection insurance?
Any views or opinions expressed above are for guidance only and are expressed in generic terms. They are not intended as a substitute for readers taking appropriate professional advice relevant to individual circumstances. We would always encourage readers to seek professional advice.
Income protection insurance for the self-employed
Create Insurance have partnered with Vitality to offer income protection and life insurance for freelancers and the self-employed