Income protection insurance

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What is income protection insurance?

Income protection insurance offers a replacement income if you’re unable to work, usually due to illness or injury. There are several types of income protection insurance, offering short and long-term cover. 

If you’re worried about what might happen if you become ill or lose your job, income protection insurance could offer you and your family security. This is our guide to what you need to know.

Is income protection worth it? 

To answer that, you have to ask yourself whether you could cope financially if you were to lose your income through sickness or injury. Without a regular salary, you could quickly burn through any savings you’ve managed to build up, with your mortgage or rent, utilities, food and travel still to pay for. Income protection insurance could give you the security of a regular income so that, if something happens, your monthly outgoings are covered. 

If you’re self-employed, or you’re employed but only have statutory sick pay (SSP) to fall back on, income protection could offer a vital safety net. 

Even if you’re entitled to SSP and don’t have any dependants to worry about, think of it this way – if an accident or illness means you won’t be able to pay your bills, then some form of income protection insurance is definitely worth considering.

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What does an income protection insurance policy cover?

What you’re actually covered for depends on the type of income protection policy you take out. How long you’re covered for (the policy ‘term’) also depends on the type of policy and insurance provider you choose. 

  • Short-term income protection can cover you for accident, sickness and unemployment if you’re unable to work for a short period of time; for example, if you break your leg or are made redundant. Policies typically cover you from six to 12 months  , although some policies will provide cover for up to two years.
  • Long-term income protection will cover you against accident and sickness if you become seriously ill or permanently disabled. It won’t cover unemployment. If you’re unable to work again, long-term income protection could provide you with a regular monthly income until you retire or the policy term ends – whichever is sooner. Check with your provider to see the exact terms. 

Income protection should not be confused with Payment Protection Insurance (PPI). PPI, notorious for being widely mis-sold in the past, only covers a specific debt if you’re unable to work because of injury, illness or unemployment. For example, it could cover your credit card, mortgage or loan repayments. Income protection gives you a tax-free monthly income that you can use as you would your regular income.

Types of income protection 

There are several types of income protection policy: 

  • Accident and sickness cover (critical illness cover) – if you find yourself unable to work because of serious sickness or injury, this cover provides an alternative income for you to pay your monthly outgoings with, until you can return to work. Policies usually pay out for one or two years. See more information about sickness and injury cover.
  • Unemployment cover – if you lose your job, this provides you with a steady replacement income. After a deferred period, which is the length of time you have to wait before pay-outs begin, you’ll begin to receive a tax-free monthly income to replace your lost earnings.
    Find more details about unemployment insurance.
  • Accident, Sickness and Unemployment (ASU) cover – a combination of the above, in the event of illness, an accident or job loss, this allows you to protect the payments on your mortgage or rent, plus any other debts. You can also access some extra income. Get more information about ASU.
  • Full income protection insurance –  provides you with a regular monthly income based on an agreed percentage of your earnings – usually 50% to 60% of your gross monthly income. Depending on your policy, this could last until you return to work, or, if it’s a long-term policy, up until you retire or die.
  • Partial income protection – it could be that you’re able to return to work but working fewer hours than you were before you were injured or became ill. Your insurance provider might continue to pay you a partial income until you return to work full-time.

How much is income protection insurance? 

This really depends on your personal situation and the insurance policy you choose. There are many things that could affect the cost of your income protection insurance. Here are some examples: 

  • Salary – Put simply, the more you earn, the more you’re looking to cover, which means your protection repayments will be more expensive.
  • Job – The riskier your job is considered, the higher your premiums are likely to be. Builders and mechanics are likely to pay more than accountants and office workers, for example.
  • Monthly outgoings – If you have a mortgage to pay or other expensive bills, you’ll need more cover to pay your existing bills if you’re unable to work.
  • Debts - If you have outstanding loans, credit or other debts, you’ll need enough cover to pay these costs too.
  • Marital status - If you have a spouse, civil partner and/or a family, you could have people who are financially dependent on you, meaning you need more cover. 
  • Age - The older you are, the more likely you are to become ill or injured, meaning you’re a higher risk to your insurance provider. As you get older, you should expect to pay more for your monthly premiums.
  • Health - If you have pre-existing health conditions, you may be more vulnerable to severe illness that might force you out of work, meaning you’ll be more likely to make a claim. If you smoke, you should also expect to pay more, as you’ll be considered a higher risk.
  • Lifestyle - If you’re active, fit and healthy, this can be helpful. But if you take part in extreme or adventure sports, you’re more likely to be injured and need to make a claim.

Do I need income protection insurance? 

It’s recommended that you have enough money saved to cover at least three months’ worth of living expenses, in case of emergencies. But even if you’ve built up a decent pot of savings, this can soon disappear if you’re out of work for a long time. 

If you and your family rely on your income to cover regular household bills, an income protection policy can ensure your lifestyle would remain unaffected if you were ever unable to work. 

If you’re not sure whether income protection is right for you, talk to an independent financial adviser. They can offer expert advice and take you through your options.

Frequently asked questions

How has the coronavirus pandemic affected income protection policies?

If you took out income protection insurance before the COVID-19 pandemic began, you should still be covered if you’re made unemployed or are seriously ill from coronavirus. However, you should check your policy wording, in case there are any listed exclusions. In most cases of COVID-19 though, illness is mild and you probably won’t need to rely on income protection insurance. You should be fine to take standard sick leave.

Does income protection insurance cover self-employed people?

If you’re self-employed, you won’t be entitled to typical employee benefits, like sick pay or redundancy pay, so income protection is something you should consider. It can give you the peace of mind that you’re financially protected if you’re unable to work. Find out more about self-employed income protection.

Can you claim income protection while on sick leave?

Income protection doesn’t interfere with your statutory sick pay, allowing you to claim both if you want to. But the general idea is that the insurance policy takes over when your sick pay ends. If you fall ill, some employers will still pay your salary for a set period – sometimes for up to 12 months. Check how much your employer will give you and for how long. 

If you make a claim for income protection, it won’t start paying out until after the waiting period you agreed to when you took out the policy. The longer this is, the cheaper your premium will be.

What’s the difference between permanent health insurance (PHI) and accident, sickness and unemployment (ASU) cover?

There are a few differences:
PHI (also known as long-term income protection):

  • will cover you until retirement age
  • can be arranged to start when your employee sick pay stops
  • only covers you for accident or illness
  • may require a medical – depending on your health history 

ASU

  • is designed to help cover salary lost through accident, illness or unemployment for a maximum set time – typically 12 or 24 months while you recover or find a new job
  • usually has a 30-day deferment period (the length of time you have to wait before pay-outs begin)
  • can include redundancy cover (in addition to accident or illness), although you often have to wait 90-120 days before you start receiving money
  • involves fewer health and lifestyle questions

Can I have more than one income protection policy?

Yes, you can. Because the policies are designed to help over different time periods and in different situations, having a combination of policies will offer the greatest protection – but you will be paying multiple premiums. For example, you may want ASU cover to protect you for redundancy and a PHI policy to cover you if illness or accident stops you working.

How much of my income will it cover?

Income protection usually only covers part of what you earned before you were unable to work; typically, around 50 to 60% of your gross monthly income.

Can I get income protection on my passive income streams?

Passive income comes from an enterprise that a person isn’t actively involved in, like money earned from investing in shares. Some providers will include passive income as long as it’s directly related to your work activities. This could be in the form of dividends, bonuses, commissions and benefits in kind. Make sure you read the policy terms and conditions, so you fully understand your insurance provider’s definition of ‘income’.

Does income protection pay out if I lose my job?

If you have short-term income protection, unemployment insurance or a bundled ASU policy, you should receive a pay-out if you lose your job. 

However, you won’t be able to claim if you buy a policy after your redundancy has been announced. It’s also very unlikely you’ll receive a pay-out if you take voluntary redundancy.
Check the terms and conditions before you buy to make sure you’d qualify for unemployment protection.

Do I need to reapply for income protection if I change jobs?

You’ll be able to keep the same policy if you change jobs, but you should let your insurance provider know. If your new job is considered a higher or lower risk, the cost of your premiums could go up or down. 

Also bear in mind that if your salary goes up, you may want to increase your cover amount. On the other hand, if your new role comes with a generous sick pay benefit, you might want to decrease the level of cover.

Does my income protection increase when my salary increases?

It depends on the type of policy you get. Some insurance providers offer the choice of an ‘increasing cover’ policy, which increases the amount of benefit you get in line with your salary.

You can typically choose between: 

  • Fixed increase cover – your benefit automatically increases every year by a fixed percentage. Be aware that the cost of your premiums will also go up.
  • Index-linked increasing cover – your benefit automatically goes up every year in line with inflation. Your premiums will also increase each year, usually at a slightly higher rate than the Retail Price Index (RPI).

How long does income protection pay-out for?

Short-term income protection usually lasts between six to 12 months, although some policies will cover you for up to two years. 

Long-term policies usually last for a minimum of five years, but can continue right up to retirement age or even for the rest of your life.

In both cases, before you take out a policy, you should check the details to make sure you’ll be covered for the time period you want.

What is an exclusion or excess period in redundancy cover?

All unemployment policies have an initial exclusion period. This is a 90 to 120-day period, depending on the insurance provider, in which you’re unable to make a claim. This is to safeguard the provider against people taking out a policy when they’re aware they’ll be made redundant in the near future.

Does income protection insurance pay out if I die?

No. If you die, your income protection insurance will no longer be valid. If you have dependants who rely on your income, you may also want to consider taking out life insurance. This will give your family financial protection if you die while the policy is running.

Who doesn’t need income protection?

Not everyone needs income protection. It depends on your personal and financial situation. Here are some examples of people who might not need income protection: 

  • You’re not the main breadwinner in your home – if you live with someone who has a secure enough job and salary to support the both of you, you might decide to only get income protection for their salary.
  • You can get by on your company’s sick pay – if you work somewhere that offers a good benefits package, you might decide it offers enough protection if you’re unable to work for a while.
  • You have enough savings – if you’ve been carefully saving over a long time, you might decide that you have enough to fall back on if you face time out of work. If that’s the case, you could bank and save the premiums you’d otherwise be paying.

Can I get income protection insurance if I have a bad credit rating?

Insurance providers may look at your credit file to make sure you’re telling the truth about who you are and where you live. If insurance providers need to access this information on your credit file, it will be a ‘soft search’ and won’t affect your credit score.

But if you have a poor credit rating, some insurance providers may not offer you income protection if they think you’ll have trouble with the repayments.

Just remember that if you have several debts, income protection is only designed to cover your regular income. If you’re already in debt, it could help to pay off what you owe but won’t necessarily be enough to pay off all of your debts. Taking on more repayments, even to protect your income, could lead you into further debt.

Author image Mubina Pirmohamed

What our expert says...

“It’s vital that you’re honest about your medical history and give your insurance provider the information they ask for. It could be the difference between a successful claim or no pay out.”

- Mubina Pirmohamed, Insurance expert

What do I need to get a quote?

Once you’ve chosen the type of income protection cover you want, we’ll ask you a few questions about:

  • your name, age and address
  • the type of job you do
  • whether you’re employed or self-employed
  • if you smoke or use nicotine-based products
  • the deferred period you choose
  • your health
  • the amount of cover you want, based on your monthly income
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Compare income protection 

It’s easy to compare prices and different levels of cover with comparethemarket.com. Just use our income protection comparison service and fill in your details and what cover you’re interested in. It only takes a few minutes to see what quotes are available to you. The insurance market is very competitive, so it’s a good idea to compare policies and prices to get the right cover at the right price. 

Make sure you check the details of the policy, not just the price, as they all offer slightly different cover. How your provider defines an inability to work can also affect when they will pay out, so make sure you are clear about what this means for your policy.