Income Protection explained

What is income protection insurance?

Income protection is an insurance product that’s designed to cover your earnings if you’re unable to work due to illness or injury. It’s a long-term benefit that typically pays out until your return to work or retirement, but there are also shorter-term (and cheaper) policies that will provide cover for a set number of years.

Types of income protection

There are normally two core levels of cover to choose from, depending on how much protection you want, and prices will differ accordingly. These are:

• Own occupation cover, which will pay out if you can’t do your own job. These policies tend to be the most expensive.
• Any occupation cover, which will only pay if you’re too ill to do any work at all, and is usually the cheapest (for example, if you’re a construction worker and damage your back, you could potentially still do non-manual work and therefore may not get a payout).

Suited occupation cover is a hybrid of the above two options, and will apply if you can’t do your own job or a similar one that’s suited to your experience and qualifications.

Short-term vs. long-term income protection

Most income protection products are long-term policies, designed to continue paying out until you return to work or retire (most will have an upper age limit too). But there are short-term policies available as well, which will typically have payout terms of 1-2 years and will stop paying benefits once that limit is reached.

These policies are cheaper, but they come with the risk that you may not be able to return to work once the term ends, and so you’ll no longer have any form of income.

What income protection covers

Income protection provides an income should you be unable to work due to a physical or mental illness or injury. Most illnesses will be covered, including:

• Serious illnesses such as cancer, heart disease and stroke
• Musculoskeletal problems, such as broken bones or severe back pain
• Mental health conditions, including anxiety and depression

Bear in mind that you’ll need to meet your provider’s definition of incapacity – their criteria for being unable to work – before your claim will be accepted. If it is, the policy will typically pay out about 50-70% of your usual earnings, with the reduction accounting for things like the state benefits you’ll be eligible to claim, the work-related expenses you’ll no longer be paying for (such as travel/commuting costs), and the fact that the income will be tax-free.

Note that this type of insurance policy is a monthly benefit that’s specifically designed to cover your expenses – including household bills, rent/mortgage and groceries – for the period in which you’re out of work, though remember that you’ll typically only receive a maximum of 70% of your salary. It’s different to critical illness cover, which offers a single lump sum payout if you’re diagnosed with a serious illness.

What isn’t covered

All policies come with certain exclusions, with the most common being pre-existing conditions. This means if you’re already suffering from a listed condition, you won’t be able to claim income protection if you later have to give up work because of it. You also won’t normally be able to claim for time off work as a result of self-harm or injuries from reckless behaviour. Remember that all policies are different, and it’s important to compare income protection policies thoroughly so you know exactly what is and isn’t covered.

Bear in mind too that this kind of insurance doesn’t typically cover loss of income for any reason other than illness or injury, such as if you’re made redundant (though some may offer unemployment cover at an additional cost). If you’re concerned about losing your job you may like to consider Accident, Sickness and Unemployment (ASU) products instead, which can provide short-term cover for no-fault job loss.

Do I need income protection?

Some people may find that income protection isn’t necessary, particularly if their employer offers enhanced sick pay, or if they have income protection insurance included as part of an employee benefits package. Others may already have such a policy as part of their mortgage, for example, or even another insurance policy, so it’s always worth checking your current level of cover. Then there are those who already have a significant amount of savings, for whom paying extra for premiums may not seem worth it.

However, for many, income protection cover can be invaluable. It can be particularly worth it if you don’t have any savings to fall back on if you were unable to work, if your employer doesn’t offer enhanced sick pay, or if you’re self-employed and don’t receive any sick pay at all. It can be especially important to consider if you’ve got a mortgage or other debts to pay and have dependents, as if you fell ill and were unable to pay the bills, you could be putting your family’s financial security at risk. For these reasons, income protection insurance should be carefully considered.

Do I need income protection for a mortgage?

You don’t legally need to have income protection for a mortgage, but a lot of people take out such policies to ensure they’d be able to cover the mortgage payments in the event they were unable to work. There are certain ASU policies specifically designed to cover the mortgage, too, though while cheaper, benefits received can only be used for this purpose and will typically only last for a set term. It’s important to weigh up whether it would be more beneficial to get a more comprehensive policy.

Do I need income protection as well as life insurance?

Life insurance and income protection are two separate forms of cover, designed to insure against different events. It’s often wise to have both to prepare for all eventualities – income protection can provide an income should you be unable to work, and life insurance can give your loved ones a lump sum on your death that can be used to cover the mortgage and/or future bills. That said, you’re under no obligation to have either.

Should I get income protection or use my savings?

This is a very personal decision, and will likely depend on how big a savings pot you actually have. It’s often recommended to have a minimum of three months’ worth of expenses saved should you be out of work for any reason, but bear in mind that if this were to run out before you could return to your job, you wouldn’t have anything else to fall back on. It’s important to consider all options carefully to decide which would work best for you and your family, and you may like to speak to a financial adviser or insurance broker for additional support.

How much does income protection cost?

The cost of income protection insurance will vary depending on your individual circumstances and policy requirements. A few things that may affect the price include:

• Your age (the younger you are, the cheaper the policy is likely to be)
• Your job (certain occupations are deemed riskier than others)
• Your health and medical history (if you’ve already got certain medical conditions you’re likely to pay more – and those conditions may be excluded from your policy – whereas if you’re in good health your premiums will likely be lower)
• Your lifestyle and hobbies (if you engage in risky hobbies or lifestyle choices, such as smoking or drinking, your premiums are likely to be higher)
• Your level of cover (whether you want own occupation or any occupation cover)
• The waiting/deferred period (the length of time between being out of work and receiving payments, which can typically range from one-12 months)
• The percentage of income you want covered

It’s important to make sure you’ve got sufficient income protection cover to account for any additional expenses that may come to light should you become ill or disabled, such as the cost of medical equipment and higher heating bills, and always make sure that you’re insured for a sufficient amount to cover your outgoings.

The best income protection insurance in the UK isn’t necessarily the most expensive, but rather the one that meets your individual needs. That’s why it’s so important to thoroughly compare income protection policies to get the level of cover that’s right for you.

What to consider before taking out income protection

• Do I already have suitable cover, such as through an employment benefit or alternative insurance product?
• Do I have enough savings to cover a lengthy period out of work?
• If not, how much cover do I want?
• Can I afford the monthly premiums?
• How long do I want to defer my payments for?
• Do I want short-term or long-term protection?

Ultimately, the main thing to consider before taking out income protection is your finances. Things like could you keep up with your outgoings if you were out of work for an extended period of time, what percentage of your salary would you need to be comfortable, and could you afford the monthly premiums? It’s important to consider things fully before you go ahead, and seek additional advice and support should you need it. Use our chart above to get started.